Title: FX Strategies Amid Policy Divergence: EUR, USD, and GBP Outlook in Focus
Originally published by eFXdata. Rewritten and expanded for clarity and context.
As foreign exchange markets remain heavily influenced by the monetary policy stances of major central banks, traders closely monitor macroeconomic indicators and central bank communication to forecast future moves. This period has seen renewed policy divergence among major economies, especially the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE). These divergent paths are shaping market expectations for the euro (EUR), the US dollar (USD), and the British pound (GBP). In this context, foreign exchange strategists have updated their views on how these currencies are likely to perform in the near to medium term.
This analysis is based on insights originally shared by Danske Bank via eFXdata, with supplemental perspectives from other major financial institutions and publicly available sources.
Key Takeaways:
– Divergence in monetary policy remains the dominant theme for FX markets.
– EUR/USD expected to continue drifting lower due to contrasting monetary policy paths.
– GBP maintains strength in the near term but faces headwinds from structural issues and fiscal policy.
Let’s explore each currency in detail, with particular attention to monetary policy, macroeconomic conditions, and key expectations shaping FX strategies.
US Dollar (USD) Outlook
The Federal Reserve continues to adopt a cautious stance on rate cuts. While inflation has moderated somewhat, recent prints suggest it remains persistent, especially in the services sector, delaying the case for policy easing. This has supported USD strength across major pairs.
Drivers supporting a strong dollar:
• Hawkish Fed policy bias: Despite earlier expectations for rate cuts in 2024, recent Federal Open Market Committee (FOMC) projections and Powell’s comments have suggested that the Fed will take its time before easing. Market pricing has adjusted accordingly, with fewer rate cuts expected this year.
• Broad-based strength in US economic data: Job growth remains solid, consumer spending is resilient, and GDP growth continues at a healthy clip.
• Higher-for-longer narrative: The persistence of inflation, especially in wage-sensitive sectors like services, reinforces the market’s belief that rates will remain elevated for longer than originally expected.
Implications for USD:
• USD has appreciated against many G10 currencies, benefiting from yield differentials.
• Global investors are allocating more capital toward the US, attracted by relatively higher yields and robust economic performance.
• The ongoing disinflation narrative, while present, is not currently strong enough to shift Fed policy or materially weaken the dollar.
EUR/USD Outlook
The euro remains under pressure due to a mix of domestic challenges within the Euro Area and a dovish European Central Bank stance. The ECB has signaled potential rate cuts as early as June 2024, citing slowing inflation and weakening growth momentum across its member states.
Why the euro is underperforming:
• ECB dovish tilt: Recent communications from ECB President Christine Lagarde and other governing council members indicate that the central bank is preparing for rate cuts. Officials have consistently emphasized falling inflation expectations and softening growth indicators.
• Soft economic performance: The eurozone economy has shown signs of stagnation, with Germany, its largest member, enduring a technical recession in the last quarter of 2023.
• Weak inflation data: Core inflation continues to trend downward, enhancing the case for monetary easing to support growth.
Market outlook on EUR/USD:
Danske Bank remains bearish on the euro, expecting EUR/USD to continue its downward trend.
Its base view includes:
• A continued divergence in relative real rates (inflation-adjusted interest rates) between the US and the eurozone.
• US economic resilience contrasts with ongoing European economic slowdown, widening the performance gap.
Other institutions such as Goldman Sachs and Morgan Stanley have echoed the bearish sentiment, revising their EUR/USD forecasts for the second half of 2024 downward toward the 1.05–1.06 range.
Technical perspective:
• Short-term support levels
Read more on USD/CAD trading.