Let’s take a look at likely movements in USD, where the Federal Reserve (Fed) is again set to take centre stage.
After nearly two years of increasing the federal funds rate, the Federal Reserve (Fed) is expected to pivot its monetary policy in 2024. This anticipated change reflects the central bank’s response to evolving economic conditions. According to a statement from the Fed’s recent policy meeting, the institution is forecasting a “soft landing” and full employment for the U.S. economy. The Fed plans to reduce its policy rate by at least 75 basis points throughout 2024 to support economic expansion, with initial cuts likely to commence in June​​.
This plan is a bit more cautious than what most people were expecting. Inflation, a critical determinant in this decision, saw a decline from a peak of 9.1% in June 2022 to 3.1% in November 2023. The Fed’s target for inflation is 2%, and the recent drop indicates a move towards this goal. However, the reduction in inflation rates has not been uniform across all sectors, with some areas such as housing still experiencing significant increases​​​​.
The global economic outlook also plays a significant role in these decisions. Slower global growth is expected in 2024, yet the dovish stance of the Fed has raised hopes for the U.S. economy, contrasting with the European Central Bank and the Bank of England’s higher-for-longer rates approach​​.
Quantitative Tightening (QT) is also making a comeback. Starting in March and wrapping up by July, the Fed plans to cut down on U.S. Treasury redemptions by $15 billion each month. This is a big deal because it shows they’re carefully dialling back some of their previous actions.
Despite predictions of the Fed cutting rates, the USD has been flexing its muscles against the top 10 global currencies. This strength comes from various factors, like the market getting too excited about an easy economic landing, mixed signals from recent U.S. labour and inflation reports, and some cautious words from the Fed in December. Plus, world events and other central banks being more cautious add to the USD’s tough stance.
While we might see the US Dollar lose some ground over the year, it’s hard to say when. We know the Fed’s current pricing is a bit over the top, but as inflation normalizes and rates get cut, we should see some interesting shifts in currency values. Central banks around the world are also doing their own thing, adding another layer to this complex situation. Luca Santos, currency analyst at ACY Securities, has drawn similar conclusions:
Excessive current Fed pricing is acknowledged, yet a normalization of the inflation environment and eventual rate cuts are expected to catalyse significant FX valuation adjustments. The intricate dance of central banks globally adds an extra layer of complexity, as they navigate their own paths of easing.
On the political front, things are heating up with the U.S. Presidential elections on the horizon. Republican primaries are pointing towards a likely nomination for former president Donald Trump, setting the stage for a rematch with Joe Biden.
The Senate is leaning against the Democrats, which could mean some political stalemate. If Biden gets a second term, we might not see much change in policies. But if Trump wins, we’ve got a lot to think about – from Europe’s defence spending to tax policies, the Fed’s moves, and even the possibility of a new trade war.
In this complex mix of central bank strategies, USD dynamics, and political shifts, we’re looking at a time of both uncertainty and opportunity. The financial markets are like a chessboard where every move matters, setting the stage for a new chapter in global economics. Let’s watch and see how it all unfolds!
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