FX Viewpoint 15 Oct 2021 | USD: A promising 2022 outlook | Article – HSBC VisionGo
- The USD will likely remain resilient, amid slowing global growth and the Fed’s forward guidance on rate hikes
- Rising concerns about stagflation have and should continue to be USD supportive
- The USD’s modest strength looks set to persist in 2022
We think slowing global growth and the Fed’s forward guidance on rate hikes point to a resilient USD
The USD has been transitioning from a weaker to stronger state this year (Chart 1). For some time, our central argument has rested on two key factors coming together to support the USD, namely the moderation in global growth and the Federal Reserve (Fed) taking a gradual path towards eventual rate hikes. The supply-side bottlenecks continue to cramp the global growth outlook, without much sign of improving. The 21-22 September Federal Open Market Committee (FOMC) meeting showed more members seeing earlier and faster rate hikes in the coming years.
Rising concerns about stagflation have somewhat supported the USD’s recent outperformance
Part of the USD’s recent outperformance is enhanced by rising concerns about stagflation. Stagflation is a state characterised by economic stagnation (i.e., slow economic growth and relatively high unemployment) accompanied by high inflation (i.e., rising prices). We believe the current market narrative is misleading, as it is a far cry from the 1970s stagflation. The ‘Misery Indices’ (i.e., the combination of year-on-year change in CPI and unemployment rate) for the US and the UK were much higher than those for Germany in the 1970s when stagflation was truly warranted. The current levels are much lower than they were back then (Chart 2).
‘Stagflation lite’ that is occurring is USD positive, in our view
Yet, there is clearly some concern about the poor mix of slowing global growth with stickier inflation. In our view, ‘stagflation lite’ – a lighter version of the 1970s stagflation – is occurring. We believe that this still plays to the advantage of the USD – one of the ‘hardest’ currencies. A more serious form of stagflation is not our base case; however, if the markets increasingly fear this scenario, the USD should also be primed to benefit.
In short, the outlook for the USD still looks promising next year, in our view.