Five Forex Market Themes To Watch In 2023

The past few years have turned the whole world upside down. The Covid-19 pandemic, Brexit, social tensions, government changes in the world's leading countries, new sanctions, the unrelenting war in Ukraine, and the China-Taiwan conflict – hit the global economy. So, as we're living through these unpredictable times, it is essential to stay mindful of the key themes that can affect the macro economy, including your Forex trading in 2023.

Fed's "fork"

As the monetary authorities, central banks regulate and supervise a country's banking system. Central banks are also known as "lenders of last resort" as they provide sufficient resources to commercial banks in case of crises and prevent them from short supply, maintaining the banking system's stability. Central banks are responsible for many aspects of the country's economy: from issuing money to controlling the currency stability, inflation rate, and employment level.

At the beginning of March 2023, Fed Chairman Jerome Powell claimed that interest rates would be higher than expected. Powell stated that the highest interest rate level would last significantly. However, the market doubts this information. Investors know that if interest rates continue to grow, many US banks will likely close, potentially bringing down the entire financial system.

The market believes the rate peak will be 4,85% instead of 5% as predicted one month ago. Then, there is a big chance the rate will decrease to 2,7% by 2025. Moreover, if the Fed manages to cope with inflation and reduce the interest rate, the economic downturn will end, favorably influencing risky assets. We recommend you watch the situation because it will probably affect the markets in 2024.

Coordinated actions of central banks

With the growth of key interest rates, the cost of money starts to grow too. The money supply decreases so that the arising issues can cause a long-lasting crisis. To avoid this, central banks try to inject liquidity.

Thus, on March 19, 2023, the Fed, the ECB, and the central banks of Canada, England, Japan, and Switzerland announced coordinated actions to expand the provision of US dollars by liquidity swap line arrangements. "The mighty six" decided to increase the frequency of seven-day maturity operations to daily. As per the US authorities, this swap-line scheme will help to stabilize the banking system and maintain the supply of commercial banks.

Central banks seek to support the global financial system and dollar liquidity. However, the issue of money and the increase in the money supply will inevitably increase the inflation rate in Western countries, so probably more shocks in their economies can occur. With no doubt, as a Forex trader, you should definitely monitor this situation.

Inflation

It is no secret that inflation negatively affects a currency's value and diminishes the level of trust in the national economy. With the rising cost of goods and services, the attractiveness of the national market is falling, which, in turn, causes multiple issues regarding exports and the reduced demand for domestic currency.

The current inflation rate in the USA is much higher than the Fed's goal of 2%. Now the Fed is trying to manage an inflation rate by attempting to decrease it during the year from the initial point of 6,410% that was in January. In May 2023, the Fed intends to make its policy decisions based on incoming data to plan all the reasonable steps to decrease the inflation rate.

Moving forward as a trader, you should closely monitor the position of the US dollar and if there are any conditions for its significant fall in value. We also should consider that the inflation issues occur not just because of the excessive amount of money in the turnover but also due to the oil price fluctuations. The rising oil prices inevitably cause the boost of the PPI as a fundamental indicator of inflation from the production side. For example, at the beginning of April 2023, OPEC+ unexpectedly announced a reduction in oil production by one million barrels per day, which led to an oil price jump. So, it is crucial for traders and investors to stay up-to-date on global oil tensions.

Geopolitics

Geopolitical events always drastically affect not only the Forex trading market but also humanity as a whole. Such geopolitical events as natural hazards, international conflicts, terror acts, and dangerous diseases violate the stability of the affected states and their national currencies, so a Forex trader should constantly stay sharp.

April of 2023 happened to witness the outbreak of the long-lasting China-Taiwan conflict. This confrontation keeps a significant part of the world on its toes. Many countries depend on the economic interactions with China and Taiwan. For example, Taiwan is the biggest importer of semiconductor chips for US tech companies. Australia has been facing certain restrictions by the Chinese government, decreasing the Australian export to China and Chinese import. Japan fears losing part of its trading route that goes through the South China Sea. We cannot be sure what the future holds for the China-Taiwan conflict, but traders should keep their eyes on the situation in 2023 and the upcoming years.

The war in Ukraine has been the most disturbing event since February 2022. The difficult year hit the biggest part of the world, including the global economy. The war is still going on and affecting the markets.

It is also essential to watch Russia-NATO and US and Europe-China relations in 2023.

Gold price fluctuation

In an unstable economic environment, finding an investment rescue island is vital. Gold became a sound investment option in 2023, being an issuer of the highest creditworthiness and reliability for over a century, which never goes bankrupt. Gold holders can be sure that it is not that possible to expand existing gold reserves in the short term due to inflation. Historically, gold is a safe-haven asset, and the current economic picture confirms it.

At the beginning of 2023, XAUUSD raised by 25%. The recession fears and the threat of inflation made investors buy gold bullion which caused its price growth. Plus, gold prices increased due to the US's weak US dollar.

Analysts and market participants expect the precious metal to rise in price in the long term. According to Charlie Morris, founder, and chief investment officer of ByteTree Asset Management, the weakening of the US dollar and the strengthening of sovereign risk indicate the readiness of gold "for large and sustained growth".

Bottom line

The Forex market depends on many different circumstances, and traders must stay up-to-date on all updates potentially affecting their trading career. This paper highlighted the five themes we consider hot and happening. However, there are way more aspects you should pay attention to. Our guides and recommendations will help you. Create your trading path with FBS!

This is for informational purposes only and does not contain — or to be considered as containing — investment advice, suggestion or recommendation for trading.