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The World Economic Forum (WEF), which is currently held in Davos, Switzerland, is the talk of the town these days.
This annual event brings together leaders from the business, political, and academic worlds to discuss and address some of the most pressing global issues.
The current WEF discussions focus on a range of topics, including climate change and the pressing issues the global economy is facing.
Let us go through some key takeaways this week, how they can impact the world economy and markets, and how you can potentially learn to trade effectively with all this news.
Let’s start with the elephant in the room – Global Recession.
Recession and Polycrisis
Two thirds of private and public sector chief economists surveyed by the Forum are predicting a recession in 2023.
Some 18% are considering a world recession “extremely likely” – which is more than as many as in the previous survey conducted in September 2022.
Here’s what WEF’s Managing Director Saadia Zahidi had to say accompanying these results:
The current high inflation, low growth, high debt and high fragmentation environment reduces incentives for the investments needed to get back to growth and raise living standards for the world’s most vulnerable.
But if recession wasn’t enough, we’ve got a new term for the global economic situation now – ‘Polycrisis’.
It’s been the word of the WEF event, and it refers to the swirl of global emergencies that include economic slowdowns and rising inflation, the war in Ukraine, and more.
The WEF has also braced this term in its annual report, citing the challenges that globalization was meant to solve.
The reasons for a probable recession and polycrisis are palpable.
There’s been a lot of uncertainty in the global economic policies to tackle various issues we have been seeing in the last few years, and it’s mounting.
This has further led the world economy closer to a recession and it could potentially impact the stock market, as a recession could lead to lower corporate profits, which could push down stock prices. Not only stocks, but the ripples of this could be felt far and wide if policy measures aren’t implemented in a planned and balanced manner.
Geo-economic Risks
Talks at the WEF also centered around the geo-economic risks which mainly were about the supply of key goods across borders or access to markets.
We have seen a couple of sanctions pop up in recent months. Be it Russian sanctions that are threatening energy security, or the U.S. campaign to deprive China of cutting-edge technology.
All this has led to trade fragmentation and it can be felt through cross-border migration, reduced capital flows, and decline in international cooperation.
As per the International Monetary Fund (IMF), the longer-term cost of trade fragmentation alone could range from 0.2% of global output in a limited scenario to almost 7% in a severe one.
And if technological decoupling is added to the mix, some countries could see losses of up to 12% of gross domestic product (GDP).
Inflation & Interest Rate Hikes
On inflation, the WEF survey saw large regional variations. The proportion expecting high inflation in 2023 was as low as 5% for China (still high) to as high as 57% for Europe, where the impact of last year’s rise in energy prices has spread to the wider economy.
As for interest rates, the WEF report showed more than 50% of the survey economists see further monetary policy tightening in Europe and the United States. It also showed that the policy-makers are caught between the risks of tightening the policy too much or too little.
JPMorgan Chase CEO Jamie Dimon went on to say that interest rates could go higher than what the Federal Reserve currently projects (i.e. 5%).
Note that the Federal Reserve has raised interest rates to a targeted range between 4.25% and 4.5% to battle the raging inflation. This is the highest in 15 years.
Moreover, it has set the terminal rate i.e. the point where officials expect to end the rate hikes at 5.1%.
2022 saw major interest rate hikes from global central banks. If this pace of rate hike is not tackled in a balanced way, there’s risk of major economic and market shifts. It could also impact the bond market, as rising inflation can potentially lead to higher interest rates, which could push bond prices lower.
Climate Change
A major theme at this year’s WEF is the need for greater action to address climate change. Many leaders are calling for more ambitious targets to reduce greenhouse gas emissions, and for greater investment in clean energy and other sustainable technologies.
The WEF talks also focused on economic inequality and the need for more inclusive economic growth. Many leaders have called for greater investment in education and training, as well as for policies that will help to create more jobs.
However, for this to happen, all the parts of an economy – from the central banks, governments to big corporations and political figures – should strive to come to a consensus and implement the planned measures.
U.S. Dollar Dominance
“The Future of the Monetary System” report, released on the sidelines of the WEF, noted that there can be likely diminution in the role of the U.S. dollar in global foreign exchange reserves.
This can be likely due to three factors:
- Diminishing need for FX reserves in a world of floating exchange rates,
- Active diversification policies of central banks, and
- Increased use of swap lines between central banks
However, the U.S. dollar represents slightly more than 60% of global forex reserves at central banks (as compared to over 80% in early 1970s). While there are no clear candidates to replace the greenback as the lead currency, the deepening of the capital market and increased trade among major emerging markets are boosting the role of their currencies.
This could have an impact on the forex market, as a shift away from dollar dominance could lead to potential volatility and changes in currency exchange rates.
Market Implications…
The WEF announcements can have major potential implications on the Forex, stock, bond, as well as commodity markets as the discussions and agreements reached in the forum can affect the economic and political stability of countries, and thus, their currencies and financial markets.
For example, if a country’s leaders announce plans to invest in infrastructure or other growth-boosting measures, this could boost confidence in the country’s economy and lead to a stronger currency and stock market.
Conversely, if leaders announce plans to raise taxes or increase regulation, this could lead to market uncertainty and volatility.
Note that the above developments are just a few of the points talked about at the Forum and there are many pressing issues which are still being discussed. We will keep you posted on those in upcoming blogs.
As for now, traders can aim to capitalize on major currency pair movements by keeping track of key events and taking well planned, informed trades.
It’s also crucial for traders to understand risk tolerance and set appropriate stop-loss and take-profit levels.
Our top analysts have been talking about the above trends in their trading rooms and they seem to be prepared for any potential volatility…
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It’s our biggest call for Q1 with around 9015+ PIPs of potential opportunity trading USD currency pairs.
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Make sure you’re not left behind. Click here to learn about our Q1 prediction.
Predicted movements expected to last through the end of Q1 2023.
Predictions are not a guarantee of this or any result. Information provided on this prediction is for general information purposes only. We offer no representation or warranty with regard to this prediction. No prediction is personalized or otherwise directed at any individual or particular circumstances. We disclaim and will not accept any liability for losses associated with this prediction.
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