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The latest 2024 outlook for major currencies, explores central bank divergence, data releases, geopolitics, technicals, market psychology & exchange rate movements.

Introduction 

Currencies play a vital role in the global financial system, facilitating cross-border trade, investments, and transactions. Currency exchange rates determine the relative price and flow of goods and services between countries. With over $6 trillion exchanging hands daily, the foreign exchange market is the largest and most liquid market globally. Understanding the forces that drive currency fluctuations is crucial for governments, corporations, traders, and investors across asset classes. 

In this context, we see the recent developments for major currencies like the U.S. dollar, Euro, Japanese yen, and British pound. We explore the economic and geopolitical dynamics influencing their exchange rates versus partners. For instance, how do changes in interest rates by central banks shift capital flows and comparative yields?

How do macroeconomic indicators like GDP growth and buildup differential between countries crash exchange rates over time? We also look at interlinkages with products like oil and gold that sway currency movements. 

By daily tracking currency pairs and the events that bring about their price actions, we can gain helpful insights for funding and investment decisions in today’s connected fast world.

Corporates dependent on imports/exports must hedge to mitigate adverse currency moves, while policymakers aim to ensure exchange rate stability and competitiveness. Portfolio managers also monitor currencies as an asset class while adjusting exposures across global markets. This report aims to understand the multifaceted currency market further.

Major Currencies, Pairs

Major currency pairs refer to the most actively traded currency pairs in the foreign exchange (forex) market. They involve the currencies of the world’s largest and most liquid financial markets.

The four major currency pairs 

1. EUR/USD (Euro/US Dollar)

2. USD/JPY (US Dollar/Japanese Yen)  

3. GBP/USD (British Pound/US Dollar)

4. USD/CHF (US Dollar/Swiss Franc)

These four currency pairs account for the bulk of daily trading volume in the forex market but we will look at all the following.

EUR/USD

The Euro has strengthened against the U.S. dollar recently, climbing from 1.10 to over 1.12 amid widening interest rate differentials. As the Fed turned more dovish, the ECB signaled further rate hikes ahead, supporting the Euro. The pair faces resistance at the 1.15 level but could target 1.18 on hawkish ECB policy shifts. 

USD/JPY

Ranging from 108 to 115 for months, USD/JPY recently surged higher, crossing 120 as the Bank of Japan maintains ultra-accommodative policy while the Fed tightens faster. However, the Yen remains historically weak, creating strains. If yields converge, the pair could see a sharp mean reversion toward 115 or even 110.  

GBP/USD

Sterling has outperformed as the Bank of England hiked rates despite recession fears. From the 1.20 handle as recently as September, Cable powered up toward the 1.25 before economic risks mounted. Still, well below year-ago levels, the pair could target 1.30 or slide back toward 1.20 over the coming months.

AUD/USD

The China reopening and resilient domestic data have lifted the Aussie to 0.70 from 0.65 lows versus the U.S. dollar over recent months. Further gains may be capped toward 0.75 if slowing global growth, easing commodity prices, and less hawkish RBA policy curb upside momentum near-term. 

USD/CAD

Weakness in oil prices and cautious BOC policy have reversed USD/CAD gains from 1.35 toward the 1.25-1.30 range, but the pair remains elevated historically. Canada’s trade links with the U.S. also limit downside, but a decisive shift lower in Fed policy could open up a move back below 1.25.  

USD/CHF

Stubbornly high, USD/CHF has traded around 0.92-0.94 in recent months as the SNB maintains currency intervention to restrain Franc strength. With Swiss inflation relatively muted, the scope for appreciation stays limited. However, any reduction in SNB activism or lower U.S. yields could trigger a Euro-like upside toward 0.97-0.98.

Key Facts Of  Major Currencies 

• They have the highest liquidity and tightest spreads due to high trading volume
• Changes in these pairs have significant impacts across the global economy and markets
• They tend to have lower volatility compared to other exotic currency pairs
• Traders often use them to track movements between major economic/currency zones like the USA, Eurozone, Japan

Let me explain it in simpler words, major currency pairs are the most widely traded and closely tracked forex pairs that provide significant insight into global economic and currency developments. They serve as benchmarks for analysis, risk management, and trading decisions worldwide

Factors Influencing Currency Movements

Central Bank Policies

Monetary policies enacted by central banks are among the most impactful drivers of currency fluctuations. Relative changes in interest rates, bond-buying programs, and adjustments of other stimulus tools like enforced reserve requirements directly shift capital flows and comparative yields between currency areas. If the Fed is hiking rates aggressively while the ECB takes a more cautious approach, the yield advantage benefits the US Dollar over the Euro.

Economic Data Releases

Macroeconomic indicators like GDP growth, inflation, retail sales, and employment metrics also significantly sway currency rates. Outperformance on these fronts signals economic strength that supports the local currency. For example, strong job additions and wage growth may prompt expectations of tighter Fed policy, benefiting the Dollar. The timing and deviation from consensus forecasts play a key role in economic data impact.

Geopolitical Tensions

Escalations in geopolitical tensions frequently trigger currency volatility stemming from shifts in risk appetite and inflation implications from things like supply-chain issues. For instance, initial news around Russia’s invasion of Ukraine lifted commodities like oil and boosted associated currencies like the Canadian Dollar. However, risk-off positioning later weighed.

Trade Dynamics

Update around global trade relationships, particularly between major economies, impact relative demand and weighting across currencies worldwide. Trade wars or even just differential growth in imports/exports due to demand shifts can strengthen or weaken a local currency over time. This links back to the overall current account and capital account dynamics covered in basic macroeconomics.

Market Positioning

In addition to the fundamental triggers outlined above, currency rates fluctuate based on market positioning by participants like hedge funds, banks, and corporates. Things like option structures, momentum signals, risk reversals, carry trade activity, and herding behavior can amplify moves in the short run across currency pairs. Assessing speculative positioning is crucial.

Central Bank Policies

Federal Reserve

The Fed has undertaken aggressive interest rate hikes in its fight against persistently high inflation. From zero bound rates, it has raised its target federal funds rate range to over 4.50% in just 11 months. While a decline in CPI inflation has prompted hopes of a potential pause or slowing in tightening, the Fed has reiterated further hikes in its bid to credibly anchor inflation expectations by taking policy into restrictive territory. As rates are projected to stay higher for longer, that points to continued dollar strength longer-term.  

European Central Bank

Conversely, while the ECB started its rate hike cycle later than the Fed, it has been steep with 2.50% worth of increases since July 2022. Officials have now raised the possibility that rates might reach “restrictive territory”. However, room for further proportionate hikes may be limited given the heightening recession worries amid an energy crisis and Ukraine war impacts. This may curb the Euro upside vs. the Dollar, though full policy convergence may be more of a story for 2024.

Bank of Japan

In contrast to peer central banks tightening policy swiftly, Japan’s dovish monetary stance remains rigidly focused on capping bond yields under its yield curve control approach in a bid to tackle low growth and inflation. 

Though inflation has crept up, policymakers see an ongoing need for substantial monetary support and aim to keep short-term rates at minus 0.10%. This stark divergence between the BoJ and other major central banks has contributed to the Yen’s weakness over multiple years.

Bank of England

While the BoE has raised rates from 0.10% to 4.00%, future tightening remains in question as the UK economy copes with myriad headwinds ranging from high inflation to Brexit transition costs to political instability. 

Officials walked back market expectations of more forceful moves higher arguing of heightened uncertainty and risks of over-tightening. The BoE though retains flexibility based on the inflation and growth outlook. This leaves Sterling prone to volatility.

Here is a draft section on the impact of recent economic data on currencies, let’s delve in together.

Economic Data Releases 

US Q4 GDP Growth

The US economy expanded at a 2.9% annualized pace in Q4, a faster clip than expected. Markets interpreted solid growth as providing leeway to the Fed to continue vigorous rate hikes without derailing the economy while also restraining inflation. This boosted the dollar index over 100 while Treasury yields climbed with bets on higher terminal rates.

Eurozone Inflation

Earlier European inflation readings bounced higher to a record 9.2% in December on sky-high energy costs, entrenching broad price pressures. However, January declined back closer to 8.5%, lifting hopes of a peak alongside easing supply constraints. Dovish members may use an inflation plateau to resist further big rate hikes, capping Euro upside.  

China Manufacturing PMI

Recent manufacturing PMI prints over 50 signal China’s vast industrial sector continues rebounding. This could ease worries over a protracted global industrial slowdown amid China’s reopening from zero-Covid policies. Industrial metal prices too gained, signaling demand. However, a full recovery will take time and the Yuan saw muted gains from encouraging figures.  

UK Retail Sales

December UK retail sales plunged more than forecast as consumer demand remains pressured by strained household finances despite easing inflation. With the UK facing an extended recession, markets have trimmed BoE rate hike expectations and question its tightening rationale if demand stays subdued. This signals a limited upside for GBP across major crosses in Q1 2023. 

Geopolitical Developments

Russia-Ukraine War

Russia’s invasion of Ukraine has weighed negatively on the Euro as the economic and humanitarian crisis risks regional growth. With the EU facing heightened uncertainty over finances and energy security from the conflict, monetary policymakers may need to tread cautiously. Heightened risk aversion has also sparked periodic safe-haven flows boosting the Swiss Franc and Japanese Yen versus the Euro.

China-Taiwan Tension

Geopolitical tensions between China and Taiwan have flared periodically, triggering risk-off currency moves. The Taiwan Dollar tends to weaken during times of strife out of its close trade links with China. Regional currencies like the Australian Dollar and offshore Yuan also decline as investors price in potential implications for global tech supply chains and growth from confrontation. 

US Midterm Elections

The split Congress from the 2022 midterms, with Republicans controlling the House, has reduced expectations of major US legislative policy changes in areas like taxes and spending. This may restrain the Dollar upside, though partisan conflicts over the debt ceiling could spark periodic volatility. Markets await the 2024 elections for the next sentiment catalyst from politics.

UK-EU Trade Relations

Ongoing talks over the Northern Ireland protocol and other aspects of the post-Brexit UK-EU trade relationship have posed an overhang on Sterling. With risks that trade disputes or political posturing could turn into economic flashpoints, investors remain cautious. However, incremental progress in negotiations has offered intermittent reprieve.  

Considerable currency sensitivity to geopolitical event risk seems likely over 2023 as well. Sudden negative developments lead to knee-jerk safety bids that propel currencies like the Yen or Swiss Franc before growth differentials reassert dominance.

Technical Analysis

EUR/USD: The Euro recently broke out above 1.10 resistance and has made a series of higher highs and higher lows, establishing an uptrend backed by bullish momentum signals like the MACD. Immediate support aligns around the 20-day moving average near 1.0750 with Fibonacci resistance around the recent swing highs of 1.10 and 1.12. A move above 1.15 would confirm Euro strength targeting 1.18. 

GBP/USD: Cable has regained its 50-day moving average, bouncing out from oversold readings, but remains stuck between broader support at 1.2000 and descending trendline resistance around 1.2400. The pair requires a meaningful push outside this range with RSI gaining 50 and 200-week moving average crosses to determine directional bias. The initial target remains the mid-figure 1.3000 handle. 

USD/JPY: USD/JPY carved out a triple top pattern under 115 resistance as policy divergence peaks between the Fed and BOJ. Profit-taking has emerged with a death cross forming between 50 and 200 DMAs. The uptrend line from 101 currently near 111 is critical support to watch. Failure risks a deeper mean reversion toward the 108 figure over the medium term should yield spreads plateau. 

In addition to fundamental developments, leveraging technical techniques like moving average envelopes, Fibonacci retracements, candlestick patterns, RSI divergences, etc. help gauge market psychology for trading opportunities across FX pairs. Identifying key inflection points backed by indicator signals and overbought/oversold readings can offer useful entry, exit, and stop-loss guidance.

Currency Market Sentiment Indicators

Currency Volatility Index (CVIX): Implied volatility across major currency pairs captures expectations of future price uncertainty and risk. Sustained spikes in indices like JPMorgan’s CVIX highlight elevated uncertainty that causes currencies to trade in wider ranges. Recently the CVIX climbed as high as 13 from around 7 as geopolitics and shifting central bank policies roiled forex markets.

Futures Positioning: The CFTC’s weekly Commitments of Traders (COT) report tracks speculative futures positioning across currencies to gauge sentiment. For example, net non-commercial USD Index futures positions currently reflect extremely bullish dollar bets. As these positions approach historical extremes, the chance of a positional unwind rises.

Sentiment Surveys: Broker polls of retail traders and large asset managers also assess bullish, bearish, or neutral expectations across FX. As per IG client surveys, GBP and EUR sentiment turned strongly bearish in September 2022 as recession fears peaked. When positioning diverges from fundamentals it often signals contrarian opportunities around trend reversals.

Tracking positioning alongside risk appetite signals can define higher probability set-ups for traders. Currency upside tends to stall or reverse when sentiment appears overly euphoric, while pessimism around currencies backed by solid data can mark exhaustion selling preceding recovery. Mixing technical and psychological markers best exploits misalignments.

Read More

• Global Market Updates-24

Final Words 

In summary, currency markets continue to be shaped by major macroeconomic developments like central bank divergence, economic data surprises, geopolitical tensions, and technical price actions. Investor positioning and sentiment add to volatility across foreign exchange pairs.

As the Fed and ECB balance inflation risks against growth headwinds, their policy trajectory will determine the Dollar and Euro direction over 2023. Meanwhile, key indicators around consumer demand, manufacturing health, and employment could sway GBP, JPY, and CAD pricing at the margins. China’s growth resurgence hinges on commodity currencies such as the Australian Dollar. 

While currencies marked wider ranges in 2022, clarity around peak hawkishness and inflation data turnaround could restore stabilizing correlation with yields, easing wild swings. Technical and sentiment markers will flag trend extremes. Regularly tracking these dynamic forces is key to navigating FX markets over the year ahead.

Stay informed on the exciting world of foreign exchange markets.