International economic outlook: January 2022

Summary

Forecast Changes

• We have made only modest changes to our foreign exchange forecasts, and now see slightly less U.S. dollar strength than previously, after a brief period of greenback consolidation at the start of this year. The British pound, Canadian dollar and Australian dollar are among the G10 currencies we expect will experience less weakness than previously forecast.
• In the emerging markets, political risks have calmed in Peru and Chile, and as a result, we forecast less weakness in each currency. While we still forecast a weaker Brazilian real, encouraging political developments lead us to forecast a more modest depreciation over the course of 2022 and 2023.
• With respect to monetary policy, we see faster Fed tightening than previously, including four rate hikes this year, as well as a start to reducing the size of the balance sheet before year-end. We also see the Reserve Bank of Australia raising rates earlier than previously forecast, with an initial rate hike expected in Q1-2023.

Key Themes

• The U.S. dollar has experienced a brief period of consolidation at the start of 2022, reflecting a soft patch in activity data and after the market spent several months adjusting to a more hawkish Fed policy outlook. However, we expect the greenback's strengthening trend to resume once the Fed starts raising rates and eventually begins to reduce the size of its balance sheet.
• Price pressures remain a key focus for financial markets, with inflation readings globally continuing to firm—and often surprising to the upside. That should see many G10 and emerging market central banks continue to tighten monetary policy this year, and global bond yields trending higher.
• China's economy finished 2021 on a steady note, though COVID, regulatory concerns, and real estate difficulties continue to weigh on the outlook. As a result, we see slower growth for China in 2022 compared to last year, even as Chinese authorities ease monetary policy to cushion the economy.

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