Everyone expected the forex market to see increased volatility at the start of the year, and rightly so, with tensions, policy shifts, and emerging global crises looming around the corner. Nevertheless, currency markets have been stable, as major central banks have stuck to a path restricting currency fluctuations. Will the rest of 2024 continue slowly, or will we see increased volatility FX traders typically rely on?
The Outlook for Major Currencies
British Pound (GBP)
Right now, the value of the British pound seems stuck between two different forces. On one side, the Bank of England might start leaning towards caution, which could push the pound down. However, both the UK and global economies are showing signs of getting stronger.
During the Bank of England’s meeting in March, there was a noticeable shift towards a more cautious approach. However, recent data on the UK’s Purchasing Managers’ Index (PMI) suggests that the UK economy might keep growing. Also, UK government bonds (gilts) have been doing better than bonds from other developed countries like the US, but strangely, this has yet to cause the pound to drop much.
Some investors might think that if the economy improves, it won’t necessarily cause prices to rise (inflation) because it could improve the country’s trading terms. However, even if this happens, it could still make people more confident, reducing the risk of the Bank of England keeping interest rates high for a long time. This could make it harder for the pound to lose value.
United States Dollar (USD)
Despite uncertain economic conditions, the US dollar has stayed strong thanks to steady inflation, a resilient economy, and high yields this year. It outperforms most other currencies in 2024, showing US economic strength.
Several factors have contributed to the dollar’s strength from January to mid-April. Investors expected the Federal Reserve to be more cautious in easing monetary policies than other countries. Initially, they anticipated several monetary expansions, but now they expect fewer. Also, commodities have gained attention in the foreign exchange market, with prices rising and Russia cutting oil production, which could boost the dollar.
Structural changes in the US economy over the past two decades, like increased crude oil production and reduced imports, have made the dollar less sensitive to commodity prices, benefiting its stability.
However, the dollar took a hit recently due to falling Treasury yields after the Federal Reserve’s policy announcement and weaker US job numbers. Fed Chair Powell’s indication of a potential rate cut despite inflation concerns initially triggered the decline, which was then reinforced by disappointing job creation and wage data.
Looking ahead, the possibility of continued Fed easing and signs of economic weakness could keep bond yields low, weakening the dollar in the short term but strengthening it in the long term.
Traders should closely watch Fed announcements and economic data using tools such as the MT4 trading platform for clues about future monetary policies. They can consider short-term strategies to capitalize on fluctuations while keeping an eye on long-term trends.
Euro (EUR)
The European Central Bank (ECB) is more confident about lowering interest rates because inflation in the eurozone is slowing down. Three ECB policymakers, Philip Lane, Gediminas Simkus, and Boris Vujcic, mentioned on Monday that the most recent data on inflation and economic growth make them confident that inflation will return to the ECB’s target of 2% by the middle of next year.
In April, inflation in the eurozone was at 2.4%, and a key indicator of how fast prices are going up slowed down a bit, even though the economy showed a slight improvement.
If the European Central Bank decides to lower interest rates before the Federal Reserve (Fed) in the US, the difference in interest rates between the US and the eurozone would be bigger. This would push down the value of the euro compared to the dollar.
However, the eurozone’s Purchasing Managers’ Index (PMI) has been rising in recent months, which could actually help support the euro’s value.
Even though the difference in policies between the Fed and the ECB might seem reasonable to those betting that the euro will lose value, it would have been better if the eurozone’s growth had also picked up as fast as the US’s.
Japanese Yen (JPY)
In 2024, the USD/JPY trend is still influenced more by what the Fed might do with its money policies rather than by the Bank of Japan. There’s a chance the Bank of Japan might step in to affect the yen’s value in the short term, but it would need to fix the main reasons why USD/JPY keeps going up.
Even though the Bank of Japan stopped its hostile interest rate policy in March, it didn’t significantly impact the market. The yen’s value dropped slightly after the announcement, and USD/JPY stayed within a narrow range of 151-152 for a few weeks.
But then, in April, the yen suddenly increased because the US dollar was doing well, especially after the US reported high inflation in March. This shows that what the Fed does matters more for USD/JPY than what the Bank of Japan does.
Since the US inflation news, people aren’t expecting the Fed to cut interest rates as much anymore. At present, the market only thinks there might be around a 0.5% cut in 2024. USD/JPY is expected to reach 155 in June 2024 but experience a slow decline to 153 in December.
Investing and Profiting in Forex for the Rest of 2024
Several key themes emerge as we look ahead to the remainder of 2024 in the forex markets. The US dollar is expected to remain strong, buoyed by resilient economic data and the potential for the Federal Reserve to lag other major central banks in cutting interest rates. The euro could face headwinds if the ECB moves ahead with anticipated rate cuts before the Fed. Meanwhile, the British pound is caught between a potentially more dovish Bank of England and better economic growth. For the Japanese yen, much will depend on the market’s perception of the Fed’s policy path rather than the Bank of Japan’s recent moves. Overall, volatility may pick up in the year’s second half as central bank policies diverge and economic conditions evolve. Traders should monitor key data releases and policy announcements to capitalize on potential forex movements.
