Inflation has been in the spotlight in the past few months as it has become evident that higher inflation could persist for a while rather than being a transitory issue. In the United States, the inflation rate has crossed the 7% figure. The situation is not much different in Europe, with UK inflation hitting a 30-year high of 5.5% and the Eurozone inflation rate rising above 5%.
In response, central banks are scrambling to lift interest rates and end their QE programs. In the United States, policymakers are happy with the state of the labor market and see soaring inflation as the biggest concern at the moment.
While uncertainties surrounding the pandemic persists, central banks will feel more comfortable with rising interest rates due to the healthy economic recovery and Omicron being less severe than previous variants.
As inflation is unlikely to cool down in the short-term and interest rates are bound to rise in most major economies, which currency pairs should traders keep an eye on?
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Below we’ve listed 5 pairs to monitor monitor, with over 70 other FX pairs also available to trade here.
1. USD/JPY
Hot inflation numbers and hawkish rhetoric from the Federal Reserve should keep the U.S. Dollar supported in the near-term. Meanwhile, a rate hike in Japan appears unlikely for an extended period of time. This makes buying the U.S. Dollar against the Japanese Yen attractive.
However, traders need to take the broad market sentiment into consideration. During times of uncertainties, the Japanese Yen is a popular safe haven. Looking at the chart of USD/JPY, we can see that the currency pair had a strong run in December when the FOMC turned hawkish but has been consolidating in a rather tight range since the beginning of the year due to geopolitical tensions and concerns about the effects of the Omicron variant.
While the panic about Omicron has largely subdued, geopolitical tensions and a sell-off in the stock market have weighed on market sentiment.
Despite that, the uptrend in USD/JPY remains intact and a stabilization of market sentiment could potentially lead to the next major leg higher.
2. EUR/USD
At its last meeting, the ECB did sound more hawkish than before. However, the hawkish repricing that followed appears to aggressive, as a rate hike is unlikely to occur until 2023. This, mixed with rising geopolitical tensions in Europe, will cap the topside in EUR/USD and prevent a sustainable recovery.
Looking at the charts, we can see a double top formation at 1.15. A daily close below 1.13 could signal the beginning of the next major leg lower, towards 1.10 support.
3. EUR/GBP
The Bank of England hiked rates by 25 bps this month and announced the reduction of its balance sheet, as expected. However, there was a hawkish surprise as four out of nine MPC members voted for a 50-bps rate hike. The market is expecting five more rate hikes to follow in 2022, and this doesn´t seem so unrealistic anymore.
With the broad USD uptrend intact, and the currency benefiting from its appeal as safe haven, traders might find EUR/GBP more interesting. The currency pair reached a top at 0.8475 shortly after the latest ECB meeting and has been steadily declining since then. A break below 0.83 could pave the way for a deeper correction towards 0.80.
4. XAU/USD
Gold is seen as popular hedge against inflation and is currently benefiting from the broad risk-off sentiment triggered by the on-going geopolitical tensions.
XAU/USD broke above a key trendline (former resistance) and the psychological $1900 resistance. Traders will now keep a close eye on $1917, as a daily close above this level could trigger further momentum buying and potentially push XAU/USD towards $2000.
5. GBP/SEK
While most central banks surprised markets by sounding more hawkish than expected, the Swedish central bank (Riksbank) is taking a different approach. It remains very cautious and doesn´t see rate hike before 2024, despite inflation marching towards the 4 % level.
The dovish stance of the Riksbank is making the Swedish Krona unattractive. One currency pair that stands out is GBP/SEK. It is already trading at a multi-year high and a break above 12.75 support would be significant, potentially signaling a continuation of the rally towards 13.65.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
