Currency Outlook First Quarter 2024

By David J. Grimaldi, TM Foreign Exchange Sales Consultant

“Expect the dollar to trade sideways in Q1, before turning lower in Q2 as the focus turns to U.S. rate cuts, which impacts the dollar more than other central banks cuts. The out performance of the U.S. economy versus the rest of the world usually translates to a weaker dollar. With 2024 being an election year, there are still unknowns with both candidates and their respective parties that could increase volatility in the currency markets.”

In December, Powell announced three rate cuts for the U.S. in 2024. The Santa rally took equity indices to new highs, and the dollar weakened broadly across the board. The U.S. outperformed this year and the recession in late 2023 never arrived like many predicted. Dollar strength continued as a result as investment flowed into the the states and the dollar demand was strong to purchase U.S. assets. Some economists are predicting growth in the U.S. could remain around 2% in 2024. Predicting a slowdown on the economy is proving difficult even with a 500 basis point (bp) increase in rates due to an unprecedented amount of stimulus injected by the government. The unemployment rate is essentially unchanged since the rate hikes, which has been perplexing to the Fed. If growth is stronger than expected and a soft landing is achieved by the Fed, dollar positions will unwind for riskier assets and currencies abroad. Alternatively, the 2024 election presents additional tail risk that would result in flight to dollars. Fed has signaled rate cuts but the messaging has not changed. A soft landing would be a green light to markets and risk on bets and a softer dollar. Conversely, a hard landing for the U.S. economy would draw safe haven bets back into dollars.

EUR/USD Sideways to Bullish

EUR/USD is still in a bearish phase, and until the technicals change that is my longer-term view. Short term I look for EUR to trade sideways to bullish on risk as market players focus on rate cuts, which are historically negative for the dollar. The Ukraine-Russia war, inflation and energy prices have weakened the Eurozone more than the U.S. economy that has been surprising resilient in 2023. The question remains on the U.S. economy in 2024 if it remains strong. The waiting game is on for interest rates that should see Europe blink first as cuts are expected in Q2 next year. ECB President Christine Lagarde said in November that “even having a discussion on a cut is totally, totally premature.” Rate cuts in the U.S. will matter most anyway and they could occur as soon as Q2 or possibly Q3. From there we might see EUR buying surpassing USD toward 1.16. It is too early to tell as 2024 election unknowns provide too many risks where we could see flight in dollars for safety.

GBP/USD Sideways to Bullish

The Bank of England has raised rates on the same pace as the Fed at 515 bp and has also unwound part of its balance sheet. While the Fed is talking rate cuts, the U.K. is encountering stickier inflation than most countries, and will not look to cut rates until next summer. Growth in U.K. should lag the U.S. as it also deals with higher energy costs. Growth has already been near zero the last two quarters. Retail sales are stalling and slowing demand may push the U.K. into recession in early 2024. The pound sterling could see more appreciation as U.S. begins cutting rates in 2024. Until then prices will be modestly higher into 2024. A monthly close above 1.3000 will be technically bullish and will see a quicker uptick in the pound.

USD/JPY Bearish

The long-term bullish trend for the dollar versus the yen is starting to show cracks. The Fed announcing cuts next year should keep 150 level protected for now, which held without any direct manipulation from the Bank of Japan this time. In addition, the BoJ will make a move away from sub-zero rates by January 2024. This could see a rapid move to 135 and possibly to lows of 2023 near 127. If growth slows in the U.S. as expected, there should be a move out of the “carry trade” as rate cuts in the U.S. for next year should mean dollar weakness. The Fed now looks to be the driver of USD/JPY lower into 2024 and not the Bank of Japan. The outlier here is the Japan economy and the effect of long term zero rates failed to produce growth. A rising rate environment should curtail growth and produce more challenges for the economy as it creates a repatriation of funds back to Japan. The carry trade that has occurred for over a decade could unwind and cause a great deal of volatility in 2024.

USD/MXN Bearish

The long-term monthly chart is looking bearish as moving averages crossed back in June. Chart technicals are looking like additional gains for the peso can be achieved if long-term support line breaks. More price separation from the moving averages could target a move to 15.0000 area in early 2024. On the macro side there is support for this as labor cost in Mexico is 20% cheaper from that of China. Also skilled labor in Mexico is far superior to that in China, promoting further influx of capital. The politics also favor growth in Mexico, as evidence we have seen more businesses in our footprint move away from doing business in China due to tariffs, politics surrounding COVID-19, slavery in Xinjiang and aggression toward Taiwan.