Interest rate hikes to curb inflation are widely anticipated in 2022. They could have a major impact on the foreign exchange market.
The US Federal Reserve (Fed) announced on December 15 that it would “reduce the monthly pace of its net asset purchases by $ 20 billion for Treasury securities and $ 10 billion for asset-backed securities. mortgage claims of agencies “. The increase in tapering signaled steeper increases in interest rates over the next two years.
The Fed aims to maintain the inflation rate at 2% in the longer term. It is currently 6.8%, the highest since 1982.
With much of the world experiencing an acceleration in the rate of inflation this year, curbing it by raising interest rates has become a key goal for many central banks.
Interest rates and inflation are two key factors in exchange rates. Low interest rates can weigh on the value of a country’s currency. The currency depreciates in an inflationary environment. As a result, interest rates and inflation could remain trending topics in the forex market over the next two years.
Ahead of 2022, let’s take a look at the most traded currency pairs in 2021 and explore what might be the best foreign currency to invest in.
Most Traded Currency Pair
Currencies are traded against each other as exchange rate pairs – a trader will have to buy or sell one currency for another.
According to the 2019 triennial survey According to the Bank for International Settlements (BIS), the most traded currency pair by volume are the euro and the US dollar.
The US dollar is the world’s reserve currency. Up to 90% of all foreign exchange transactions were made in US dollars, BIS data showed.
EUR / USD
According to the BIS survey, EUR / USD is the most traded currency pair in the global market, accounting for 24% of the daily volume of OTC currency turnover in 2019.
With the Fed set to raise interest rates next year, the USD is expected to appreciate widely in 2022. The US dollar index hit a 17-month high of 96.88 on November 24. Although the index has since fallen to 96.36 at the time of writing (December 22), it has remained around its one-year high – up 7.5% since the start of the year.
The USD was one of the best performing currencies in 2021.
At the same time, the European Central Bank (ECB) adopted a more accommodating position. The market does not expect interest rates to rise in the next 12-18 months, Dutch bank ABN AMRO said.
The ECB Governing Council expects that “the main ECB interest rates will stay at their current levels or below until it sees inflation hit 2% well before its end of the year. projection horizon and durably for the rest of the projection horizon, ”ABN AMRO reported.
The ECB predicts that the inflation rate will rise to 3.2% in 2022, down from 1.9% in September this year. The rate is expected to drop to 1.8% in 2023, remaining at that level until the end of 2024.
Due to the policy divergence between the ECB and the Fed, the euro should to be under pressure in 2022.
As a result, RBC said in its October report that it had reduced its EUR / USD forecast to $ 1.27 for the next 12 months, from the previous projection of $ 1.30.
the euro index is down this year. As of December 21, down 7.8% compared to 122.25 at the start of the year.
Given the divergent performance of the US dollar and the euro, this could be one of the most profitable currency pairs in 2021.
USD / JPY
According to forex trading tools and FXSSI data provider, the Japanese yen could be one of the safest currencies in which to invest.
“The country’s inflation rates have been low for long periods. This currency is not pegged to the US dollar or the euro and therefore retains its purchasing power even in times of crisis, ”said FXSSI.
The currency pair is known for its high liquidity – the yen is the most traded currency in Asia.
USD / GBP
Following the UK’s withdrawal from the EU, uncertainty over the country’s future trade relations with the bloc weighed on the British pound (GBP).
With political tensions over the post-Brexit trade deal, Northern Ireland and a potential referendum on Scottish independence, RBC believes that “the macroeconomic landscape continues to suggest the pound will be underperforming relative to to the euro, the yen and cyclical currencies ”.
RBC expects the pound to appreciate against the US dollar to $ 1.40 in 2022, up from the current rate of $ 1.33 (Dec 22).
Most volatile currency pairs – USD / TRY
US / TRY is the most volatile currency pair. To boost exports, investment and create jobs, Turkish President Recep Tayyip Erdoğan has implemented a series of interest rate cuts in recent months amid double-digit inflation. This caused the exchange rate of the pound to fall against the dollar.
The USD / TRY started the year at 7.44 and hit 16.66 on December 19.
Earlier this week, the Turkish government offered compensation for exchange rate losses to savers if they held their money in lire, instead of converting the money to US dollars or gold.
Following the announcement of this new savings plan, the pound rebounded. It has gained nearly 23% over the past two days, making it the most volatile currency this year. The USD / TRY exchange rate was 12.52 on December 22.
Keep in mind that price performance is no guarantee of future returns. And never invest more money than you can afford to lose
Read more: USD / TRY Forecast: Will the lira roller coaster continue?
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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade a CFD.
You can still benefit if the market moves in your favor, or suffer a loss if it moves against you. However, with traditional trading, you enter into a contract to exchange legal ownership of individual stocks or commodities for cash, and you own it until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the total value of the CFD trade to open a position. But with traditional trading, you buy the assets for the full amount. In the UK there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs come with overnight costs to hold trades (unless you’re using 1 to 1 leverage), making them more suitable for short-term trading opportunities. Stocks and commodities are more normally bought and held longer. You could also pay a commission or brokerage fees when buying and selling assets directly and you would need a place to store them safely.
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