Sharp slowdown in inflation

FX strategists expect a drastic decline of up to 2.5% in the Consumer Price Index in 2023 and a slowdown in inflation. It has already been confirmed by many indicators. However, not all economists are so optimistic. They argue that a significant slowdown in inflation is unlikely. Thus, it will remain at higher levels than expected. For this reason, the CPI is projected to slide to a wide range of 4%-6% in 2023. Against this background, analysts anticipate an increase in stagflation expectations. If inflation stays persistently at 4%-6%, it will signal a contraction in the global economic expansion as well as stagflation with zero growth in GDP.

S&P 500 to remain in bears’ claws

According to preliminary estimates, the S&P 500 index will be unable to break out of a bearish trend and will plummet in 2023. Sharp rate hikes by the Fed, soaring inflation, and low corporate earnings are among the main reasons for its decline. Against this background, the S&P 500 index is likely to keep falling for the second year in a row. This year, it could dive below 3,100, reaching 2,867, the lowest since May 2020. The net profit margin for the S&P 500 will remain at the current level. Companies included in this index are likely to retain low profits at the levels of 2022. As a result, they will be able to avoid a recession. However, the S&P 500 in 2023 will hardly extend gains.

Yields of 2-year and 10-year Treasuries to rise sharply

Prolonged inflation and the Fed's aggressive tightening may push the yield of 2-year US government bonds to new highs. The figure could reach a whopping 5.25% this year. Naturally, the growing yield of 2-year Treasuries will facilitate an increase in the yield of 10-year US notes. However, the yield curve inversion by about 50 basis points could persist. It means a rise in the yield of 10-year government bonds to 4.75%.

Main central banks to raise rates above 6%

This year, analysts expect several changes in the monetary policy settings of leading central banks. In 2023, inflation is believed to remain in the range of 4%-6%. At the same time, the US economy is likely to remain resilient. The Fed will have to hike interest rates above the 5.1% level announced at the December meeting. By the end of the year, the key rate could exceed 6%.

USD to slide in narrow range

Plenty of forecasts have been made for the US currency in 2023. The majority of analysts assume that the US dollar has already approached its highest level of the current upward cycle. Thus, a decline should follow. However, many FX strategists expect the greenback to get trapped in a narrow range amid an increase in interest rates in the US, Europe, and Japan. In this case, the US dollar index will slide to a range of 101-115.

BTC to lose momentum

Bitcoin is also likely to face many obstacles in 2023. Analysts predict a downtrend for BTC in the short and medium term. At the same time, the further recovery of bitcoin is questionable. High interest rates and monetary tightening are the main bearish factors. It will be extremely difficult for crypto speculators to reap a profit when trading this digital asset. According to preliminary estimates, in 2023, the No. 1 cryptocurrency could take a nosedive to $11,000.