FX Talking: Laser-focused on a lower dollar

Following the lumps and bumps of stronger activity and sticky inflation data through the early months of the year, we think now is the time for the market to focus its attention on the Federal Reserve easing cycle. After all, the Fed has made it reasonably clear that it wants to cut rates and that it would take quite a lot to blow it off course.

That means a dollar bear trend should reveal itself over coming months. As discussed on these pages previously, we think FX market price action of November and December last year provides a preview of what is ahead as 2024 unfolds. A steeper US yield curve, a benign decline in the dollar, commodity currency outperformance and perhaps even the Japanese yen leading the pack as it corrects years of undervaluation.

Market consensus expects EUR/USD at 1.10 by year-end. We continue to look for levels in the 1.14/15 area as rate differentials and stronger global growth prospects support the euro. After Switzerland fired the starting pistol for rate cuts in Western Europe, we look for European Central Bank and Bank of England rate cuts starting from June and August, respectively. Yet these should slow, not reverse, the rallies in EUR/USD and GBP/USD. Norway’s krone should outperform.

In the Emerging Market space, the Polish zloty stands out as the best story in Europe. Asian FX will continue to lag as China takes time to build momentum. And in Latin America, we are fearful that Banxico might apply the brakes to the super-strong Mexican peso. However, Banxico looks unlikely to copy policy in Chile, where the currency looks to have been abandoned as the local bank slashes interest rates.