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Wholesale Banking

G10 FX Talking: Back up in short term rates is a dollar positive

We sympathise with the increasingly common notion that the currency will trend lower in 2024. Nonetheless, we believe that markets are mispricing a reduction in Fed rate as early as March, and a rise in short-dated USD yields may provide the currency some short-term breathing room. It's possible that rangebound trading in G10 may continue to be the norm for a little while longer.

  • There seems to be a strong conviction out there that the dollar will weaken this year. We agree with the view but expect this story to be more evident through the second quarter – a point where short-dated US yields start to fall sharply ahead of the first Fed cut. We look for the first cut in May and 150bp of easing in all. At present, the Fed expects it will cut 75bp this year.
  • Before then, the market looks to have got ahead of itself in pricing 18bp of Fed cuts at the March meeting. This looks highly unlikely and, combined with seasonal trends which support the dollar in January/February, should keep EUR/USD near 1.08/1.09.
  • Far too much ECB easing is priced in as well (150bp vs. our call for 75bp). But a back-up in rates could weigh on equities and the euro.
  • USD/JPY came close to 140 in late December as the broad dollar decline and speculation over a Bank of Japan (BoJ) policy change drove sentiment. Regarding the BoJ, the mood music from Tokyo suggests no imminent changes. Wages have yet to deliver a virtuous circle for consumption and inflation and the BoJ might revise down its GDP and CPI outlook at its 23 Jan policy meeting.
  • Yet we think 152 probably was the top for USD/JPY and it will struggle to hold above 146/147 levels now. Also, the better terms of trade story is providing external support for the yen.
  • Two outside risks: 1) Geopolitics and a spike in oil prices are JPY negative 2) US Treasury Refunding risk on 29 Jan & higher UST yields.

To find out more about the G10 FX Talking points and detailed forecasts, access the full report here