Q4 2024 Central Banks Outlook
The change in policy by major central banks may continue sway foreign exchange markets over the remainder of 2024 as the Federal Reserve projects a lower trajectory for US interest rates, while the Bank of Japan (BOJ) remains reluctant to carry out a rate-hike cycle.
North America
Federal Reserve
The Federal Open Market Committee (FOMC) delivered a 50bp rate-cut in September in an effort to ‘help maintain the strength of the economy and the labour market,’ and it seems as though the central bank will further reduce US interest rates as the committee begins the ‘process of moving toward a more neutral stance.’
Source: FOMC
The fresh forecasts from Chairman Jerome Powell and Co. suggest the FOMC will recalibrate its policy throughout the remainder of 2024 as ‘the median participant projects that the appropriate level of the federal funds rate will be 4.4 percent at the end of this year.’
The change in regime may continue to influence foreign exchange markets as well as the carry trade even though Chairman Powell insists that ‘we are not on any preset course,’ but signs of persistent inflation may lead to a greater dissent within the FOMC as Governor Michelle Bowman preferred a 25bp rate-cut.
In turn, the US Dollar may face headwinds over the remainder of the year as the Fed starts to switch gears, and it remains to be seen if the US election in November will impact the outlook for monetary policy as the FOMC emphasizes that ‘policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.’
Europe
European Central Bank
The European Central Bank (ECB) cut Euro Area interest rates for the second time in 2024, with the Governing Council voting for a 25bp rate-cut in September after sitting on the sidelines in July.
Even though the ECB no longer provides forward guidance for monetary policy, it appears as though the central bank will gradually unwind its restrictive policy as the ‘staff continue to expect a rapid decline in core inflation, from 2.9 per cent this year to 2.3 per cent in 2025 and 2.0 per cent in 2026.’
As a result, the ECB may reach its neutral stance later than its US counterpart as President Christine Lagarde and Co. pledge to ‘keep policy rates sufficiently restrictive for as long as necessary,’ and the different approach in managing monetary policy may continue to influence foreign exchange markets as major central banks still combat inflation.
EUR/USD Weekly Chart
Source: TradingView
EUR/USD may further retrace the decline from the 2023 high (1.1276) as it trades to fresh yearly highs ahead of the fourth quarter, with a break/close above the 1.1260 (50% Fibonacci extension) to 1.1280 (61.8% Fibonacci retracement) zone opening up the 1.1430 (100% Fibonacci extension) to 1.1440 (61.8% Fibonacci extension) area.
Next region of interest comes in around the 2022 high (1.1495) but EUR/USD may hold within last year’s range if it struggles to break/close above the 1.1260 (50% Fibonacci extension) to 1.1280 (61.8% Fibonacci retracement) zone.
Failure to hold above the 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension) area may push EUR/USD back towards the August low (1.0778), with the next region of interest coming in around the July low (1.0710).
Asia/Pacific
Bank of Japan
Meanwhile, the Bank of Japan (BoJ) appears to be in no rush to implement higher borrowing costs as the central bank votes unanimously to keep the benchmark interest rate at 0.25% in September.
Furthermore, the policy statement from the BoJ suggest the central bank has little intention of pursuing a rate-hike cycle as ‘there remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices.’
With that said, the Japanese Yen may continue to serve as a funding-currency even though Governor Kazuo Ueda and Co. warn that ‘it is necessary to pay due attention to developments in financial and foreign exchange markets,’ but the shift in the carry-trade may generate increased volatility in FX markets amid the change in global interest rates.
USD/JPY Weekly Chart
Source: TradingView
Even though USD/JPY failed to hold above the December 2023 low (140.25), the exchange rate may mirror the price action from the end of last year amid the failed attempt to close below the 140.50 (61.8% Fibonacci retracement) to 141.50 (38.2% Fibonacci extension) area.
In turn, USD/JPY may attempt to retrace the decline from the August high (150.89) but the exchange rate may no longer reflect the bullish trend from earlier this year amid the flattening slope in the 50-Week SMA.
A break/close below the 140.50 (61.8% Fibonacci retracement) to 141.50 (38.2% Fibonacci extension) area may indicate a further shift in the carry trade, with a breach below 138.70 (78.6% Fibonacci extension) opening up the July 2023 low (137.24).
-- Written by David Song, Strategist
Follow David on X: @DavidJSong
