H2 2024 Central Banks Outlook
A growing number of major central banks have started to alter the course for monetary policy as the European Central Bank (ECB) delivered a 25bp rate cut in June, while the Federal Reserve appears to be in no rush to switch gears as the central bank continues to combat inflation.
North America - FED Outlook
Federal Reserve
The Federal Open Market Committee (FOMC) may stick to a restrictive policy ahead of the US election as ‘the inflation data received earlier this year were higher than expected,’ and the central bank may further adjust the forward guidance over the coming months as Fed officials now forecast ‘the appropriate level of the federal funds rate will be 5.1 percent at the end of this year.’
Source: FOMC
The upward revision in the Fed’s interest rate dot-plot may become a reoccurring theme as the central bank carries out a data-dependent approach in managing monetary policy, and a growing number of officials may scale back their forecast for rate-cuts in 2024 as the FOMC ‘will need to see more good data to bolster our confidence that inflation is moving sustainably toward 2 percent.’
Nevertheless, it seems as though the FOMC has no intentions of pursing a more restrictive policy as the committee is ‘prepared to maintain the current target range for the federal funds rate as long as appropriate,’ and Chairman Jerome Powell and Co. may continue to prepare US households and businesses for a change in regime as the central bank remains ‘committed to bringing inflation back down to our 2 percent goal.’
In turn, speculation for a shift in Fed policy may influence foreign exchange markets as the central bank continues to forecast lower US interest rates in 2024, and the FOMC may join its major counterparts later this year as ‘reducing policy restraint too late or too little could unduly weaken economic activity and employment.’
Europe - ECB Outlook
European Central Bank
The European Central Bank (ECB) reduced interest rates for the first time since 2019 even though the staff projections showed an upward revision in the inflation forecast, and the Governing Council may take additional steps to support the economy on the back of ‘gradually diminishing price pressures.’
According to the ECB, Euro Area inflation is ‘expected to decline towards our target over the second half of next year,’ and central bank may continue to change gears as ‘the risks to economic growth are balanced in the near term but remain tilted to the downside over the medium term.’
As a result, President Christine Lagarde and Co. may deliver additional rate cuts over the coming months despite the lack of forward guidance, and it remains to be seen if European officials will take steps to insulate the economy from geopolitical risks as ‘a weaker world economy or an escalation in trade tensions between major economies would weigh on euro area growth.’
EUR/USD Weekly Chart
Source: TradingView
EUR/USD appears to be negating a potential head-and-shoulders formation as it holds within the 2023 range, but the failed attempt to push above the March high (1.0981) push the exchange rate back towards the yearly low (1.0601).
A close below 1.0610 (38.2% Fibonacci retracement) may lead to a test of the 2023 low (1.0448) but EUR/USD may face range bound conditions amid the flattening slope in the 50-Week SMA (1.0818).
At the same time, EUR/USD stage further attempts to test the March high (1.0981) if it continues to close above 1.0610 (38.2% Fibonacci retracement), with the next area of interest coming in around 1.1070 (23.6% Fibonacci retracement to 1.1090 (38.2% Fibonacci extension).
Asia/Pacific - BoJ Outlook
Bank of Japan
Meanwhile, the Bank of Japan (BoJ) may continue to move to the beat of its own drum as the central bank plans to reduce its purchases of Japanese government bonds (JGBs) but offers little details on the upcoming change to its non-standard tool.
Still, the BoJ may further adjust its policy as ‘Japan's economy is likely to keep growing at a pace above its potential growth rate,’ and Governor Kazuo Ueda and Co. may adopt a more hawkish stance in the months ahead as ‘underlying CPI (Consumer Price Index) inflation is expected to increase gradually.’
However, it seems as though the BoJ is in no rush to embark on a rate-hiking cycle as ‘there remain high uncertainties surrounding Japan's economic activity and prices,’ and the different approach in managing monetary policy may continue to influence foreign exchange markets with the Federal Reserve on track to keep US interest rates higher for longer.
With that said, the threat of a currency intervention may persist as Japan’s Ministry of Finance (MOF) revealed that its foreign exchange intervention operations for the period from April 26 to May 29 totaled ¥9,788.5 billion, and future developments coming out of major central banks may also impact carry trade interest as market participants brace for a change in regime.
USD/JPY Weekly Chart
Source: TradingView
A breach above the April high (160.22) may lead to a test of the April 1990 high (160.40), with the next region of interest coming in around the December 1986 high (163.95).
At the same time, a weekly close below the 155.80 (June 1990 high) to 156.40 (78.6% Fibonacci extension) may push USD/JPY back towards the former-resistance zone around the 2023 high (151.91), with the next area of interest coming in around 149.40 (100% Fibonacci extension) to 150.30 (61.8% Fibonacci extension).
