You are currently viewing What could drive forex prices in 2022 and why should traders care?

What could drive forex prices in 2022 and why should traders care?

The forex market is the largest of all financial markets with daily trading volumes of over $6 trillion and a total market cap in the quadrillions.

The size of this market makes it an appealing choice for both retail and institutional traders seeking to make money out of the relatively small price swings that fiat currencies experience every day.

In 2022, nearly two years after the pandemic started, the macro landscape is shifting in a way that could affect the value of some of the world’s most prominent currencies amid the confluence of both positive and negative catalysts.

In this article, we summarize some of the most relevant variables that could shape the performance of individual pairs in the forex market for those who are still learning how to trade currency.

#1 – Actions from central banks

Central banks took decisive steps during the first couple of months of the pandemic to contain the impact that the virus crisis had on the financial markets.

The measures adopted included a reduction in interest rates, the introduction of multi-billion asset purchase programs, and specific initiatives to help small businesses via loan guarantees and other similar mechanisms.

Now that is the worst part of the health crisis seems to have passed, some of these measures might start to be reversed. For the forex market, the possibility of multiple interest rate hikes taking place across the world and a reduction in the market’s overall liquidity could lead to some short-term instability – especially in the riskiest corners of the market.

#2 – Inflationary pressures

Partially as a result of the measures mentioned previously and also due to the ongoing supply chain crisis, inflation in multiple latitudes is accelerating at a worrying pace.

Higher commodity prices are perhaps the most important catalyst for this increase in prices and the markets have taken notice of the potentially prolonged nature of the phenomenon.

The countries that fail to take appropriate steps to contain an escalation in prices may face a deterioration in the value of their respective currencies amid a reduction in their purchasing power.

#3 – Geopolitical tensions

Russia is on the brink of war with Ukraine and conversations among the world’s largest military potencies are starting to get heated.

A full-blown invasion of Russia to this country could trigger a chain of events that could disrupt the world economy.

On a separate front, tensions between the United States and China resulting from a potential invasion of Taiwan are also looming on the backdrop. Even though the situation is not as severe as that seen in Ukraine, it is worth watching as a rapid escalation in the conflict could lead to some turmoil in the forex market.

#4 – The economic aftermath of the pandemic

Even though the pandemic seems to be entering its last stage before it stops being considered as such, the economic ripples of this major event are far from being over.

One of these potentially long-lasting consequences is the disruption in the global supply chain caused by a sharp spike in the demand for goods and raw materials and due to the inability of suppliers to fulfill higher order volumes.

The longer it takes for this problem to be solved, the more complicated the macro picture will be at a point when inflation is threatening to reduce the purchasing power of some of the world’s most prominent currencies.

Moreover, labor shortages are also a factor to consider as they could have an impact on economic growth in the mid to long-term depending on what is causing them.

Bottom line

The financial markets evolve rapidly, and narratives change faster than traders and investors can often notice in an increasingly globalized economy. With this in mind, the variables cited above are just some of the most prominent in a vast universe of potential catalysts that could drive currency prices in the future.

Even though the pandemic might not be the dominant force shaping currency values at the moment, the ripple effects of this crisis are still affecting the performance of this market and may continue to in the following years depending on how governments respond.