Recession is in the air for 2023, with most major economies suffering at some point in the next twelve months, if not already. Certainly the US is looking more likely to fall into recession with weakness in housing, service and manufacturing sectors. This might curtail the Fed’s plan to increase interest rates.

Risk sentiment is improving partly due to the recent apparent easing of US-China relations which is helping non-US currencies. The Fed has supported the dollar by implying further rate increases are on the cards. The Euro had recent encouraging news about industrial output which has given it some support after recent lows against the US$. Easing energy prices also helps the Euro but going forward it is likely to really be at the whim of the US$ and global risk appetite. Sterling whilst also more dependent on US$ strength/weakness will hope to be supported by the Autumn statement out this week.

Markets dislike uncertainty, and FX markets are particularly prone to this. With the global financial crisis, driven by all factors known to us, it is difficult to predict any movement therefore. Certainly, the deepening EU energy crisis as winter approaches. Recessionary fears globally are a major concern obviously, and the continual strengthening of the US$ adds to this.

It is worth considering for a moment the yearly movement on exchange rates and thus their impact on prices as the new season begins. At $/€1.19 last September prices were 19-20% better with regard to imports than today should raw material prices be similar. Meanwhile the £/€ is roughly similar and the £/$ is also worse by also 19-20%. Why is this happening despite Central banks intervention and interest rate rises? Well it is about the serious and more or less inevitable deep recessionary fears within the EU & UK.

The EU is struggling the most in these current trading conditions, with Germany announcing its first trade deficit in 30 years, and the Euro at its weakest point against the US dollar in ten years. The trade shock of rising import costs, oil & gas price levels and trade disruptions have come to bear severely. Euro zone inflation is rapidly increasing too.

The Euro has edged upwards in recent days as the situation in China relaxes a little and the sensitivity to the Ukraine/Russia situation settle down a little. This combined with a less pessimistic view of the potential rise in US interest rates has favoured the Euro and indeed Sterling. Sterling was also heled by the recent £15 billion fiscal package softening the cost-of-living issues faced by all. Currencies remain vulnerable to the global outlook however which is increasingly uncertain and thus volatility is here to stay.

The US dollar is definitely benefiting from the adverse risk scenario we are all feeling, and with Sterling under pressure due to political instability we are seeing rates reach their worst position for some years. The Euro will be supported by the ECB over the coming weeks with interest rises more or less guaranteed for July. But we are approaching US dollar parity which is incredible.

The Ukrainian-Russia situation still dominates international markets. With the US seeing increasing inflation there is some sentiment for a half percentage point interest rate hike which will assist keeping the US dollar firm. In the UK weak data, escalating inflation, and liquidity challenges brought on by rising prices has weakened Sterling. The UK is also performing worst in the global trade recovery where our exports have declined 14% against a global recovery of over 8%, The UK is the only country that has not recovered to pre pandemic level of exports, a symptom of Brexit.

Obviously, the situation that developed in Ukraine last week is and will continue to have a major impact on foreign exchange markets and equities. This volatility will remain for some time, although to date the impact has been relatively minimal bearing in mind the financial sanctions imposed on Russia. Fundamentally the Euro has taken the worst of the adjustment, followed by Sterling as funds move to safe haven currencies, in particular the US$. This will cause imports to increase price, although of course, exports will show some foreign exchange weakness to counteract the adjustment somewhat. It is very hard to see this situation change in the coming months.