FX Quarterly Review Q1 2023

A cover of a blog post with a quarterly review of Q1 2023 by Match-Prime Liquidity

I. Introduction

Our FX quarterly review provides an overview of the current state of the market and industry with a focus on key events, trends, regulatory changes, and projections for the next quarter. Its purpose is to help market participants—traders, investors, and institutions—stay informed and adapt to changing market conditions.

Let’s start with a general introduction to our FX quarterly review. In the first quarter of 2023, there was a notable increase in volatility during the banking crisis in March, although the preceding two months were relatively stable. Markets were heavily influenced by the actions of the U.S. Federal Reserve (Fed) and other major central banks, the ongoing conflict in Ukraine, a rising-rate environment, and several bank failures. Market conditions were quite volatile and challenging to navigate, with every rate hike and news cycle bringing fresh hurdles.  In response to the ever-changing market environment, societies continue to reopen and economies begin to return to an undefined state of normalcy, investors and traders are reassessing their positions, risks, and fundamental beliefs.

II. Foreign Exchange (FX) Market Overview

US Banking Crisis

The next section of our FX quarterly review is an overview of the entire Forex market. The bank run on Signature Bank and Silicon Valley Bank raised concerns about the financial stability across the broader banking spectrum. Policymakers’ actions have stabilized the financial system, but the question remains whether they will be sufficient to ensure that the idiosyncratic risks of a few banks don’t turn systemic.

Market volatility returned abruptly over the last couple of months after a period of relative tranquility. European banks are better capitalized and hold larger amounts of liquidity. Euro area banks will be probably less impacted by mark-to-market losses on their bond portfolios. Nonetheless, the risks should not be underestimated, and a significant credit tightening is on its way, particularly in the US. Pressure on loan growth will intensify, especially in small US banks, and banks will likely face higher funding costs as they try to stem the sharp pick-up in investment in money market funds.

Fixed Income

What’s next in our FX quarterly review? The first quarter of 2023 noted positive growth sentiment due to falling energy costs and the reopening of China’s economy. However, inflation measures started to rise again. The collapse of Silicon Valley Bank in mid-March caused a sharp rally in government bond markets, with some markets discounting rate cuts instead of hikes. Central banks continued with interest rate hikes, with the Federal Reserve announcing two rate hikes of 25bps each, and the Bank of England approving two rate hikes of 50bps and 25bps respectively. The US dollar was weaker against most G-10 peers due to changes in rate hike expectations.

US Dollar

Going further with our FX quarterly review, the US dollar remained stable against most G10 currencies at the end of Q1 2023 as the Federal Reserve (Fed) raised interest rates by 25bps to 4.75%-5.00% and indicated that only one more rate increase is likely this year. This pullback from aggressive rate increases seen in 2022 may be viewed as a dovish turn in policy, keeping the base rate in restrictive territory to combat inflation and supportive of the US dollar. 

Inflation remains the key metric to watch for predicting Fed policy. A deceleration in inflation will give energy to those positioned for the Fed to conclude the tightening of monetary policy. The path of the US dollar will be data-dependent, focusing on the levels of inflation, employment data, and the state of the US consumer.

Euronext Volumes

The next section of our FX quarterly review deals with industry events and trends. Euronext FX’s spot forex trading volume declined by 13% to $1.4 trillion during Q1 2023 compared to the same period of 2022. The daily average volume also dropped by 14.4% to $21 billion. However, in March 2023, spot forex trading activities gained 26.4%, reaching $521 billion compared to $412.2 billion in the prior month, and the average daily volume rose by 10% to $22.7 billion. Euronext also recorded the third-highest equity value traded in history on March 17th, with a total value of trading during the day at €27.6 billion.

Metatrader Mobile App

In February 2022, Apple suspended the company’s original MetaTrader app due to violations of the App Store’s guidelines. In the middle of February 2023, it returned to Apple’s App Store, but not in its original form. The company launched a new messaging app called TeamWox Communicator, which allows users to communicate with colleagues and clients, share files, and even hold video conferences. MetaQuotes CEO Renat Fatkhullin said that the new app would serve as a testing ground for other products developed by the company, including the MetaTrader trading platform. 

AI and ChatGPT

Let’s proceed to the indispensable part of any FX quarterly review: innovation. It is a natural thing in the FinTech world, but the arrival of OpenAI’s advanced language model GPT-4 is set to impact the industry like never before. Compared to its predecessor GPT-3, it has greater natural language processing capabilities, which is why it is expected to boost efficiency and productivity in financial services, revolutionizing the way businesses operate, interact with customers, and utilize data. GPT-4’s impressive feat lies in its ability to accurately generate human-like text. 

AI can help financial firms in various ways, e.g. by improving customer service, reducing costs, and providing more accurate insights for investment decisions. Also, AI can help with fraud detection, risk management, and regulatory compliance. Thanks to its extensive training on various text sources, GPT-4 can engage in nuanced conversations, answer questions, generate content, and even write code.

However, there are some ethical implications of using AI in financial services, such as bias and lack of transparency. While AI has the potential to transform the financial services industry, it must be used responsibly and ethically to ensure its benefits are realized.

IV. Regulatory Changes and Compliance


Going further with our FX quarterly review, let’s talk about regulatory changes. The Financial Services Authority of St. Vincent and the Grenadines (SVG) has issued a warning and requirements for its registered Forex entities to provide evidence that they also hold a license approved in the jurisdictions where they conduct business. Failure to comply with it by March 10, 2023 may result in sanctions.

CySEC: Russia Sanctions

CySEC, the regulatory authority of Cyprus, issued Circular C551 to inform its regulated entities of the Tenth Sanctions Package adopted by the EU Council against Russia. The circular highlights the new reporting obligations on frozen funds and economic resources of the listed individuals and entities and immobilized reserves and assets of the Central Bank of Russia, as outlined in the amended Article 8 of Council Regulation (EU) No. 269/2014 and Article 5a of Council Regulation (EU) No. 833/2014.

Denial of Service Attacks

Recently, DDoS attacks on Forex Brokers have surged, with Cyprus being heavily targeted. These attacks aim to disrupt services and overload a Broker’s server with traffic, causing their website or trading platform to become unavailable. Experts advise Forex Brokers to invest in DDoS protection services to mitigate the impact of these attacks. They also recommend educating employees on cybersecurity best practices and testing their systems’ resilience to such attacks on a regular basis.

Artificial Intelligence

On February 1, 2023, ESMA published its TRV Risk Analysis Report on ‘Artificial intelligence in EU securities markets’ (the ‘Report’). In its Report, ESMA warns that the widespread use of artificial intelligence (AI) comes with risks. In particular, increased uptake may lead to the concentration of systems and models among a few ‘big players’. These circumstances warrant further attention and monitoring to continue ensuring that AI developments and the related potential risks are well understood and taken into account.

FATF Updated Country List

On February 24, the Financial Action Task Force (FATF), a global organization that sets standards for combating money laundering and terrorist financing, announced that it had suspended Russia from its membership. This decision was made due to Russia’s failure to comply with the FATF’s requirements, which include developing and implementing effective measures to combat money laundering and terrorist financing. The suspension means that Russian banks and financial institutions will face additional scrutiny and could have difficulty accessing international banking services. In addition, FATF has also added South Africa and Nigeria to its “gray list,” a move that can be devastating to these nations’ economies.

V. Projections for the Upcoming Months

Looking ahead in our FX quarterly report, bank stocks are currently at low valuations and the Q1 earnings season may address some concerns surrounding the banking system. The estimated Q1 2023 earnings decline for the S&P 500 is -6.6%, which is the largest decline since Q2 2020. The US banking system is currently under stress, and the conversation is shifting to when and how fast the Federal Reserve will begin cutting rates. The Fed’s most recent summary of economic projections sees rates elevated around 5% through the end of 2023. How markets react to the upcoming rate-cut cycle will largely depend upon the context driving it.

A weaker dollar is expected to make gold even more attractive. Bitcoin has gained over 70% since the beginning of the year and has significant upside potential once it breaks the psychological $30,000 barrier. Oil prices are likely to remain high in Q2 due to production cuts, but the situation in Russia and Ukraine could have a significant impact on oil prices and energy stocks.

If you find this FX quarterly review useful, make sure to come back to our blog in the next quarter for the next analysis. See you!

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