Currency market rises as dollar continues mixed | Posted by Libertex (Europe) | Coins | February 2024

Since 2020, the world has been in a period of constant uncertainty. As the coronavirus crisis ended, the world was suffering from runaway inflation and central banks had to take drastic measures to raise interest rates. No regulator has been more responsive or aggressively hawkish than the U.S. Federal Reserve (Fed). This quick action seemed to pay dividends in the form of quickly lowering inflation closer to target levels without damaging labor or stock markets. This naturally led to a rapid strengthening of the dollar in 2022, even pushing it to historic parity with the euro and multi-year highs against all its closest rivals, from the Australian dollar to the British pound.

Now, just 18 months later, the U.S. currency is depreciating at an alarming rate against almost every major world currency. Treasury bond interest rates have reached the lowest level in two years, and the normalization of the foreign exchange market appears to be just around the corner. But what are driving these moves, what are the implications for currency investors, and where are the major pairs likely to head for the rest of 2024?

After a series of rate hikes to combat inflation, the Federal Reserve has kept rates steady for several months now. Now that inflation has stabilized, news of a Federal Reserve interest rate cut is making the rounds. Fed Chairman Jerome Powell has said we should not expect a rate cut in March, but CME Group’s FedWatch Tool estimates a 96% chance of a rate cut by May.

However, it is important to note that US regulators have been much more aggressive in raising interest rates in 2021-2022. Even now, U.S. interest rates are almost 1 percentage point higher than those in the euro zone. Nonetheless, the psychological effect of switching from interest rate increases to cuts will always exaggerate the impact on national currencies. That said, the EUR/USD pair is still up nearly 3% in the past month, showing that the market is recognizing the overall health of the dollar compared to the euro.

Meanwhile, the Bank of England’s stance, famous for following the Federal Reserve’s lead in aggressively raising interest rates, remains hawkish. The BoE has made no firm commitment to cut rates, currently between 5.25 and 5.5%, and this is reflected in cable, which has risen nearly 5% since November 2023. On the other hand, the RBA is like the ECB. , which raised interest rates to 4.35% before switching to a wait-and-see approach. This appears to have dealt a blow to Australia’s progress against the US, with AUDUSD down 5% to 0.65 YTD. If rate cuts occur before May, we will see these pairs normalize to their pre-pandemic averages.

Besides the impact of the monetary policies of major central banks, movements in most parts of the world are driven by other factors that are often overlooked. For example, large economies such as China and India are very sensitive to domestic factors, raw material market developments, and global industrial sentiment. For example, the rupee has recently risen slightly against the US dollar amid the release of a favorable national budget that sets a lower-than-expected fiscal deficit and a gross borrowing target for the fiscal year starting April 1. Industrial PMI India and China exchange rates have risen to 56.90 and 49.20 respectively over the past two months, naturally helping to maintain the strength of the national currencies. China’s yuan has also gained a separate boost in the form of widespread adoption as a transaction currency in other parts of the world, which is quickly taking market share away from the dollar. Over the past two years, the yuan’s share of Russian exports has increased from 0.4% to 34.5%, and efforts to further expand BRICS could further increase the yuan’s attractiveness.

Meanwhile, the Japanese yen, a traditional haven currency, has had a terrible time over the past two years. Failing to raise interest rates sufficiently, the BoJ has overseen a nearly 25% decline in the value of the yen since January 2022. Manufacturing and services PMIs grew for a second straight month following Governor Kazuo Ueda’s hawkish post-conference speech in January. , it appears that the JPY/USD pair could reach a turning point after testing its 50-day SMA. As always, it makes sense for forex investors to diversify to maximize protection from the volatility of individual currency pairs.

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