What Forex Traders Need to Look Out For In Q2 2023

While the global economy has made significant progress in vaccination campaigns and reopening their economies, impacts from the Covid-era monetary policies continue to inflict financial consequences. Additionally, geopolitical tensions between Russia, Ukraine, China, and the US, coupled with trade disputes, continue to impact the global economy.

Against this backdrop, this article will provide an overview of the economic outlook for some of the world’s largest economies in Q2 2023, including the United States, China, Eurozone, and Japan.

United States

Through 2022, supply chain bottlenecks, coupled with rising demand for goods, and energy uncertainties from geo-political tensions, forced the prices of goods higher. Since May 2022, the Federal Reserve (Fed) started to raise interest rates to combat the issue of rising inflation in the US.

As of February 2023, total interest rates in the US are 4.75%, nearing the highs of the 2008 Great Financial Crash. The aggressive rate hikes implemented managed to simmer US inflation from its 30-year highs of 9.1%, to 6.4% (January 2023).

With the Fed’s 2% inflation goal in mind, current inflationary numbers in the US are still three times higher. In the next quarter, there are expectations for the Fed to continue its hawkish rate path as inflationary pressures are forcing the cost of living higher.

This also equates to the expectations of a bullish dollar. As interest rise, monetary conditions slow down, and demand for the currency rises. This also attracts overseas investments, boosting its value.

China

What was supposed to be a triumphant year for China in 2022 became a struggle to undo the impacts of its Covid-zero policy. Harsh enforcements damaged China’s economy, leading to unprecedented waves of infections and deaths.

However, towards the tail-end of 2022 and through the first two months of 2023, China’s reversal of its initial Covid-zero policy, along with financial measures to prop up its housing sector, brought in major optimism.

The rebound of China’s economy can be evidenced by its factory activity reaching the fastest growth in a decade, far surpassing economic expectations back in 1^st March 2023.

Looking forward, if economic data in China continues to expand and improve, optimism of its reopening would be further evidenced in the next quarter. Investors can expect oil prices to find a support and push higher as consumer travel and market sentiment improves.

Eurozone

Eurozone is in a similar situation as the US, struggling to balance the pace of interest rates to still-high inflation. During October 2022, inflation in the Eurozone peaked all-time highs of 10.6%, and the Euro Central Bank (ECB) had to raise interest rates are keeping it at 0% for almost 5 years.

Just like the Fed, the ECB is also targeting for 2% inflation. Even with the hawkishness the ECB has established in its rate hike cycle, inflationary pressures as of February 2023 is at 8.5%, more than four times the central bank’s target.

However, the situation in Eurozone has its differences from the US. 24.4% of the energy consumed by the European Union is derived from Russia ^[14]. With the Russia-Ukraine conflict still on-going, energy prices in the Eurozone remains unbelievably high.

Due to the uncertainty of the Russia-Ukraine conflict, the Eurozone’s economy during the next quarter is expected to decline or at best, remain stagnant.

Japan

Economic and monetary policies implemented by the Bank of Japan (BoJ) are unconventional and vastly different than other central bank counterparts.

BoJ has maintained an ultra-easy monetary policy for more than two decades. This includes unlimited governmental bond buying to intentionally weaken the Yen and keeping interest rates extremely dovish at -0.1% since 2016.

The current BoJ Governor, Haruhiko Kuroda, has further amplified BoJ’s ultra-easy monetary policy since he was first appointed in 2013.

However, a drastic change in Japan’s monetary policy may be looming in the background. In the next quarter during April 2023, current BoJ Governor Kuroda will be giving up his seat to Kazuo Ueda. Economists expect Ueda to depart from on-going ultra-easy monetary policies, possibly bringing value back to the Yen.

Global Commercial Banks

As major central banks globally are raising interest rates to combat rising inflation, tighter monetary conditions within the economy are proving to be an uphill battle for banks.

As of March 2023, US commercial bank Silicon Valley Bank (SVB), collapsed due to a capital crisis and was taken over by federal regulators. High interest rates within the US economy diluted the value of long-term bonds bought by SVB when interest rates within the US were near 0%. Unrealised losses and escalating customer withdrawals led to SVB’s end.

Another big-name financial institution, Credit Suisse, which is Switzerland’s second-largest lender, had to be bought over by UBS Group AG for $3.2 billion to avoid a financial crisis.

These situations that took place across less than two weeks, serve as a cautious reminder that with the rise of interest rates in major economies, vulnerabilities in the financial system have to be addressed as well.

Conclusion

Overall, the US, China, Eurozone, and Japan are expected to experience different economic conditions based on their respective monetary policy responses.

Global economic outlook for the next quarter remains flat, with inflation remaining above key healthy levels, interest rates to increase, and geopolitical tensions to stay elevated. Through such a volatile period, it is critical for investors to stay adaptive through volatile fundamental conditions.