While global risk appetite improved generously in the first quarter of 2023, US and EU growth has begun to decelerate considerably and there is now growing concern that the world economy is entering a recession.
The end of the current economic cycle
With US GDP contracting for Q4 2022, and with inflation still growing at double the average yearly rate, we seem to be going through the “contraction” stage of the current economic cycle. That being said, fears of a repeat of the 2008 global financial crisis, for now at least, appear to be unfounded. While we are seeing some cracks in our banking system, today’s monetary landscape is far more robust than the unregulated environment of 2008.
What we saw happen with niche banks like Signature and SVB in the U.S., and Switzerland's Credit Suisse was the result of the ultra-aggressive interest rate hikes by the US Federal Reserve. In less than a year, the Fed has raised its benchmark rate to 5% - the highest rate since 2007 - responding to inflation rising at its fastest pace in decades.
Are we in a recession?
The saying goes when the US sneezes, the world catches a cold. Analysts are currently debating whether we are technically already in a recession or not, but the truth of the matter is that a recession is not only unavoidable, but it’s also what the US Federal is banking on. The Fed is aiming for a controlled recession with sustained higher interest rates and stricter lending standards.
The good news is that inflation has been trending lower for the past 3 months and we could see even lower inflation in mid-2023. In terms of how the stock markets are reacting to the news, it is important to always remember that the market is forward looking. I would expect that as soon as the Fed signals its last rate hike, the stock market will begin to recover. Any unexpected easing in monetary policy could also spark a full-fledged rally in the tech, stock, and cryptocurrency markets.
Forex Q2 2023 Outlook
One apocalyptic scenario that is being discussed recently is the possibility of the de-dollarization of the global economy. This involves countries reducing their dependency on the global reserve currency – the US dollar – for international trade. For example, in late March, Brazil and China reached a deal to trade using their own currencies rather than the US dollar.
Q1’s biggest de-dollarization story was China’s negotiations with Saudi Arabia to price some of its oil sales to China in yuan. However, the dollar’s dominance remains very strong; as of late-2022, the greenback accounted for 60% of the total foreign reserves. Countries seeking alternatives to the U.S. dollar is not a recent phenomenon and while in the long term the dollar is bound to deflate, I don’t think its status as a global reserve currency will be overturned any time soon.
In terms of other major currencies, the British pound has a lot of room for upside in Q2, 2023 but it all depends on whether the Bank of England can manage to bring inflation back under control. A major contributing factor to the U.K.’s inflation troubles are rampant energy prices. Therefore, a resolution in the Ukraine-Russian conflict could see the GBP and EUR surge higher against the USD in Q2, 2023.
Gold and Bitcoin set to appreciate
The banking crisis, inflation worries, and rising global uncertainty drove a lot of investors to safe-haven assets and specifically gold in the first quarter of 2023 and unless there’s any change to the current volatile climate, I would expect gold prices to continue to trend higher in Q2. A weaker dollar will also make gold even more attractive to investors in Q2.
Bitcoin is also worth keeping an eye on, as BTC/USD gained over 70% since the beginning of 2023. Bitcoin has a lot of upside potential once it manages to breach the key psychological $30,000 barrier. I would also expect the cryptocurrency market to begin its recovery once the regulatory landscape becomes clearer and as soon as the Federal Reserve’s agenda pivots away from monetary tightening.
Oil prices likely to remain high
In early Q2, oil prices surged after several of the world's largest exporters announced surprise cuts in production. The trend is set to continue as exporters will seek to maintain prices at current levels during the summer season. What I would urge investors to keep an eye on is the situation in Russia-Ukraine. Any positive outcome on that front could decimate Brent and Crude valuations along with energy stocks.
The bottom line
Q2 is set to be another exciting quarter for traders and investors. The truth is that no one can predict with certainty the events that will unfold in the future. What’s important is to understand the potential impact of each scenario and create your trading or investment strategy accordingly, while also taking into account all the possible risks.
Diversification is key, especially nowadays when the macroeconomic environment is so volatile. At Orbex, we help our readers and traders understand the intricacies of the financial markets and prepare for nearly every possible scenario. We invest in our clients’ long-term success by providing them with some of the best research and analysis in the markets in the form of live webinars, daily market briefs, video courses and exclusive outlooks and projections. You can learn more about Orbex and our services by visiting our website at orbex.com.
About the Author:
Mohammed Al-Mariri, Head of Training and Market Strategy at Orbex
Head of Training and Market Strategy at Orbex Mohammed Al-Mariri is a Chartered Market Technician (CMT) and a member of the American Market Technicians Association (MTA). He has over 15 years of professional trading experience and has developed an advanced approach to fundamental analysis with a focus on risk management strategies. He chairs several investment conferences and leads the Orbex Research and Analysis team. Al-Mariri hosts live webinars, seminars and events and is often invited to appear live on major media outlets including CNBC and Al-Arabiya to share his expert insights on the markets.
