In a turn of events following predictions of a less chaotic year from the two-year grip by COVID on many economies, 2022 has been quieter on the pandemic front and more chaotic on the economic front. 

The Ichimoku Cloud definition as explained in PrimeXBT provides an overall market snapshot to influence decisions made when forex trading or taking positions in other assets. The indicator, in most of 2022, highlights poor runs in the markets occasioned by rising inflation and increasing tension in Eastern Europe. The hostile economic environment has hit all fronts, including the Forex markets that are reeling from the non-uniform base rate increments by different central banks.

How Do Interest Rates Affect the Forex Markets

Interest rates are the best base points to understand the influence of inflation on the forex market. Higher interest rates set by the central banks are lucrative for local and foreign investors. The investors rush to take positions in government-backed securities that also peak in return rates when interest rates are high.

The USA, alongside the UK, was the first country to tighten its monetary policies, following the increasing inflation that followed post-COVID lockdowns. The UK started to take action when inflation stood between two and 4 percentage points. Higher rates in the US set by the fed reserve compared to the Euro area that has remained quiet in the interest front means that the dollar is strengthening against other major currencies.

Countries in the EU, dependent on the position taken by the European Central Banks (ECB) have little control over the Euro. Domestic legislations like imposing caps on energy prices and food items are the only levers available to curb increasing inflation. Even so, such moves are becoming impossible to make due to rising political tensions. 

What are some Dramatic Moments in the Currency Market

The Euro’s dramatic fall to parity with the dollar has hit the headlines in the second week of July 2022, and further a downward trend, as seen in PrimeXBT, to below the dollar is a shocking development in the crypto markets. 

Such a dramatic scenario last came about 20 years ago for a major currency covering the Euro area. However, the tight squeeze on consumers occasioned by rising energy prices and the unrelenting ECB that has taken its time to react has pushed away investors to the dollar.

Until July 2022, the ECB was yet to trigger an interest rate increase, making government-backed securities that are a hot cake during inflationary periods to be less lucrative compared to those in North America and places like the UK.

Are the Forex Markets Ripe?

Forex markets are highly volatile, especially with the current actions initiated by central banks to tame inflation. Many markets, including the skeptical Euro area, are looking for a balance to set rate hikes that will shift the consensus in the currency markets. 

Markets are extremely sensitive, especially when food prices are at an all-time high. Judging by the daily price swings in PrimeXBT regarding the forex space, shifts from one currency to the other happen quickly. Planned hikes will usher many movements to areas that promise better returns for investors. 

News coming from the U.S. shows an increased appetite for higher interest rates to come before September 2022 to curb the inflation that is approaching 9 percent in North America, while in other major markets it has already crossed the critical point.

Crossing over to Europe, woes will continue to dominate the Euro because of the political heat brewing in France and Italy. France has its fair share of issues, as President Macron has lost control of parliament, which makes moves to counter inflation and protect the Euro a daunting task. Italy‌ is staring at a political crisis that will further destabilize the Euro. 

Future Outlook of the Currency Market    

The leadership in Italy is looking at the prospect of losing one imperative party that forms the coalition government running the country. France is at a crossroads with a government having a minority in parliament. The situation in Italy and France might spark an election risk, widening the Bund-BTP spread. However, the steps taken by the ECB might caution the situation soon.