Recession, inflation and currency exchange – what’s next?

Important events and global currency market update for the month of December 2022.

Xe Corporate

December 1, 2022 10 min read

Central banks around the world have raised interest rates in the last few months as inflation reaches levels not seen in nearly 40 years.

Noteworthy Upcoming Events 

  • December 4 – OPEC meeting 

  • December 6 – Australia GDP 

  • December 7 – Canada – Bank of Canada interest rate decision 

  • December 13 and 14 – US Federal Reserve and the US CPI meeting 

  • December 13 – UK – Financial Stability Report 

  • December 14 – New Zealand GDP 

  • December 14 – Australia Employment Data 

  • December 15 – UK Monetary Policy Committee meeting 

Recession fears are currently plaguing global economies, and with inflation rising to levels not seen since the early 1980s in many cases, most central banks are raising interest rates in a bid to get consumer prices back under control. 

Central banks around the world have raised interest rates in the last few months as inflation reaches levels not seen in nearly 40 years. A global recession also looms large for many countries before the end of the year and is expected for some to stretch well into 2023 or even 2024. 

How long and how deep the recession is for each country depends on a variety factors and rising interest rates could leave companies and individuals with high mortgages or other debt facing bigger repayment costs, meaning less available cash to spend which would boost the economy. The central banks do not have an easy choice, as both raising rates and price inflation mean disposable income is reduced which impacts the speed of economic recovery. You could call it a perfect economic storm. 

There are limited ways in which the central banks can bring inflation under control, so they have little room to manoeuvre, and raising interest rates is typically the answer. 


For example, the European Central Bank raised interest rates at its fastest rate yet – by 2 percentage points in its last three policy meetings– as it struggles to rein in inflation in the Eurozone. It hit 10.6% in October, moving further away from the ECB’s target of 2%, partly due to rising energy prices which have been pushed higher by the war in Ukraine.  

Luis de Guindos, Vice-President of the ECB, said: “People and firms are already feeling the impact of rising inflation and the slowdown in economic activity. Our assessment is that risks to financial stability have increased, while a technical recession in the euro area has become more likely.” 

Christine Lagarde, president of the ECB, went further, saying that Europe is not only “facing a sequence of ill-fated events – the pandemic, the energy crisis, Russia’s unjustifiable invasion of Ukraine and high inflation – but that as a result, the environment around us is also changing”. 

She added: “Additionally, although recent data on GDP growth have surprised on the upside, the risk of recession has increased.” 

Rates are likely to rise further, said Ms Lagarde, but how far and how fast “will be determined by the inflation outlook”. 

Higher interest rates tend to be good news for currency strength, yet the myriad factors affecting the current global economic climate mean the traditional link between interest rate rises and currency strength may not always play out as expected. Add to this higher mortgage and other borrowing costs coming so soon after both individuals and companies work to recover ground lost during the pandemic, mean there is unlikely to be good news for economic recovery in the short term. 

With interest rate rises you would expect a currency to strengthen, but this did not happen across the board to the euro on the back of the latest ECB rate rise, in fact it weakened against the US dollar. On November 1, the day before the rate rise took effect, the euro was worth US$0.987 but by November 3, it had weakened to US$0.975.But this was more to do with the US dollar strengthening over the same period. 


A similar picture is emerging in the UK as the Bank of England also raised interest rates on November 2 by 0.75 of a percentage point to 3%. Again, you would have expected this to strengthen the pound, but this did not happen against the US dollar, again because of its relative strength. On November 1 it was US$1.145, but by November 3 it had weakened to US$1.118, and while the pound strengthens and weakens over time like any currency, it is generally considered a much weaker currency now than it once was. 

The difficult economic conditions in the UK are not expected to improve any time soon. The Bank of England even went as far as saying it expects the UK to suffer its longest recession in 100 years which could stretch into the middle of 2024. The BoE’s Monetary Policy Committee notes for November also seemed to hint that Brexit has been a factor in pushing up costs and prices. 

It stated: “Higher prices for the goods we buy from abroad have also played a big role. During the Covid pandemic people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad. 

“There is also pressure on prices from developments in the United Kingdom. Businesses are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. That means that employers are having to offer higher wages to attract job applicants. Prices for services have risen markedly.” 

US and Canada

The Federal Reserve is also raising rates to fight inflation, with a 0.75 of a percentage point increase on November 2 taking the rate to a range of 3.75% to 4%, which is likely to peak at 4.5% to 4.75% next Spring. In contrast to both the euro and the pound, the US dollar has strengthened considerably this year. In fact, the US dollar Index has gone up by more than 17% this year which makes it one of the best performing holdings of 2022 so far. 

Canada’s central bank also raised rates in October by 0.5 of a percentage point, which was less than anticipated, as it pushes to restore price stability within the Canadian economy. Tiff Macklem, governor of the Bank of Canada, told the House of Commons Standing Committee on Finance that economic growth is expected to stall in the next few quarters, but after this growth should “pick up, our economy will grow solidly, and the benefits of low, predictable inflation will be restored”. 

Mr Macklem added: “To put this in numbers, growth in gross domestic product (GDP) is projected to decline from about 3.25% this year to just under 1% next year and then rise to 2% in 2024. And inflation is expected to hover around 7% in the final quarter of this year, fall to around 3% by the end of next year and return to the 2% target by the end of 2024. 

“If we don’t do enough, Canadians will continue to endure the hardship of high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and, potentially, a severe recession to control inflation. Nobody wants that. 

“If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people’s ability to service their debts, for their jobs and for their businesses. 

“This tightening phase will draw to a close. We are getting closer, but we are not there yet.” 


Much of the fortunes of Asia-Pacific currencies – which would include both the Australian and New Zealand dollar – are influenced by whatever is happening in China, primarily because it is the world’s second largest economy by GDP, behind the USA.  

It is little surprise then that the recent protests against China’s zero-Covid policy, which has kept many areas of China in a severe lockdown since August, have prompted a flight to safe haven currencies as markets react negatively. The protests, which followed the death of 10 people in a fire that reportedly could not be put out and they could not escape from because of the strict lockdown rules, have spread across China at universities and on the streets of various cities including Wuhan, Shanghai and Beijing. 

In a rare move, some protesters were chanting for Xi Jingping, the Communist leader of China, to step down – something unheard of before because of the likelihood of severe consequences. While the protests may have calmed somewhat at the time of writing, they could rise again at any time as sentiments are running so high. 

Stock markets around the world have been hit by the unrest and concerns about the ongoing lockdowns and their impact on China’s manufacturing capabilities. During the unrest, both the Japanese yen and the Swiss franc – which are also considered safe-haven currencies alongside the US dollar – both appreciated on Monday, November 28. The US dollar had fallen back slightly but recovered the following day. 

As if to prove the point about how closely the value of the Australian dollar is linked to China’s economic fortunes, it fell by around 1.61% against the US dollar on November 28 as concerns about the performance of the Chinese economy continued. 

Going forward, if China’s approach to lockdown continues to be as severe or the unrest gets worse, then the growing concerns about its economic performance – especially in the run up to Christmas when so many products from China are bought – could weigh heavily on world markets and currencies such as the Australian and New Zealand dollar. This is something that anyone moving money in Asia-Pacific currencies will need to keep a close eye on. 

Recession and the cost-of-living crisis 

There is no question that inflation and the cost-of-living crisis are the biggest factors affecting the global economy for the remainder of the year and the start of 2023. How this will impact currency movements remains to be seen, as the typical strengthening of currencies on the back of interest rate rises may not correlate, as we have already seen over the last few months.  

The US dollar has appreciated most strongly against other currencies, which has somewhat skewed the picture for anyone moving money to or from US dollars, and this may continue until we see more stability returning to the global economy. 

The IMF’s World Economic Outlook Report, published in October, said: “Persistent and broadening inflation pressures have triggered a rapid and synchronized tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies. Tighter global monetary and financial conditions will work their way through the economy, weighing demand down and helping to gradually subjugate inflation. 

“So far, however, price pressures are proving quite stubborn and a major source of concern for policymakers. We expect global inflation to peak in late 2022 but to remain elevated for longer than previously expected, decreasing to 4.1 percent by 2024.” 

What does this mean if you need to make international money transfers in the coming months? 

The result of all of this is that the picture for currencies over the coming months is relatively unclear, although the US dollar strength is expected to be maintained. Much will depend on how successful the central banks’ policies are in reducing inflation and limiting any recession, but it will be some time before we know the answer to this question.  

Yet any shocks – political, economic or otherwise – could create unexpected shifts in currency values that will be hard to anticipate.