Analysts at Deutsche Bank don’t see the Federal Reserve cutting rates until June 2024 but they see swift easing in the final five meetings of the year, with rates falling by a cumulative 175 basis points next year.
That’s a highlight of “The House View” report released today.
The key themes related to foreign exchange are:
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EUR/USD Forecasts: DB anticipates that EUR/USD will remain in a range in 2024 and a slow rise to 1.10 by Q4 2024. This projection is based on the assumption of coinciding easing cycles by the Federal Reserve and the European Central Bank around the middle of 2024 with the ECB ultimately cutting by 100 bps.
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Market Dynamics and Influencing Factors: The report suggests that an earlier easing cycle by the ECB, combined with delayed rate cuts by the Fed, could test the parity level of the exchange rate. Conversely, an early recession in the US followed by rapid Fed easing could lead to a quicker rise in the EUR/USD rate.
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Other Major Currency Pairs: USD/JPY is expected to rise from 147 to 150 bb year end, then decrease to 135 by Q4 2024. They see the BOJ abandoning YCC in Q1. GBP/USD is forecasted to decrease from 1.26 to 1.22 by year end, and then to 1.20 by Q4 2024 with the BOE cutting by 75 bps.
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Implications of Economic Conditions on FX: The report highlights the influence of global economic conditions on foreign exchange markets. For example, the timing and nature of central bank policy shifts (such as easing or tightening cycles) are significant factors affecting currency exchange rates. The interplay between different economic indicators, policy decisions, and global events can lead to fluctuations in the FX market.
Overall, the report is cautious on 2024 with no major economy growing more than 0.8% and Canada leading the way. They expect a mild US recession and a risk of higher inflation. They warn that political risks are high with votes in the US, India, Taiwan and European parliament.