Forecast (EUR/USD) (GBP/USD) and (USD/JPY) in 2024

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Forecast (EUR/USD) (GBP/USD) and (USD/JPY) in 2024

Expect the EUR/USD pair to show modest gains this year as the US economy slows, inflation is lower and the Federal Reserve Bank (Fed) adopts less restrictive monetary policy.

Because tighter financial conditions will discourage businesses and individuals from borrowing and spending (“deflation”), this will slow the economy and cause inflation to slow (“deflation”). ), the Federal Reserve is expected to begin cutting interest rates in the spring. .

This will depreciate the dollar and increase the value of the euro.

Based on historical seasonal patterns, the dollar tends to perform well at the beginning of the year and with the eurozone potentially entering a recession, the first quarter may be too early to see a significant recovery in the EUR/USD pair, so a second quarter seems more likely. .

However, dollar liquidity increased significantly in the first quarter due to a combination of the depletion of the Overnight Reverse Repo Facility (ON RRP), withdrawals from the Treasury General Account (TGA) and the pricing of spreads in the Bank Term Funding Program (BTFP). This could overcome seasonal patterns and cause the EUR/USD pair to strengthen sooner than expected.

Other potential obstacles to the EUR/USD recovery include a further slowdown in economic growth in the euro zone and the possibility that the European Central Bank will also cut interest rates, according to the report.

The discount rate should prevent yield spreads from narrowing as much as expected. So if the ECB cuts interest rates earlier and the Federal Reserve cuts them later, that could weaken EUR/USD.

Lastly, let's not forget the upcoming US presidential election! Elections can have a significant impact on the dollar, but predicting the exact nature of that impact requires a lot of speculation (“guessing”). Since the candidates have not yet been finalized, we will have to wait and see.

For example, although Trump's election in 2016 initially strengthened the value of the dollar, it has since stabilized, suggesting that other factors play a more important role in the long term. The failure of him in 2020 also did not cause large fluctuations in the currency.

For now, I think the Fed's interest rate path and the ECB's stance will likely have a bigger impact on EUR/USD than the election results. If the Federal Reserve continues to raise interest rates faster than the ECB, the dollar could appreciate regardless of who wins the presidential election.

GBP/USD

Sterling took off in 2023 after the Bank of England (BoE) aggressively raised interest rates to combat rising inflation.

Even at a 15-year high of 5.25%, the Bank of England is expected to keep interest rates this high. This stance has supported sterling, especially as the Bank of England's approach has been stronger than that of the Federal Reserve.

But the story does not end there. While high interest rates currently support the pound, they are also slowing the economy.

With inflation expected to decline over time, the Bank of England is likely to begin cutting interest rates in mid-2024. Cuts are expected to be around 100 basis points in the second half of the year. This scenario will cause problems for the pound.

If UK economic data turns out to be much worse than expected, attention could shift from the central bank's monetary policy to the deteriorating economic situation, which could further weaken the pound.

On the other hand, if economic data continues to beat expectations, this could lead to the Bank of England deciding not to cut interest rates (or cutting them less than expected), which would weigh on the pound.

USD/JPY

The Japanese yen (JPY) is the biggest loser in 2023, falling against the rest of the major currencies.

Because? Because Japan's central bank, the Bank of Japan, follows a "zigzag" path, while other central banks follow a "zigzag" path.

While other major central banks are raising interest rates to combat inflation, the Bank of Japan is still keeping interest rates below zero. This "too lax" policy makes holding the yen less attractive than other currencies that offer higher yields.

However, things can change. There have been rumors that the Bank of Japan will abandon subzero interest rates, along with expectations of future rate cuts.