The currency market is in for another volatile year in 2024. Expected interest rate cuts from most major central banks, the risk of the UK and Eurozone slipping into recession as well as elections in the UK and US will all be in focus.
But how might this shape exchange rates in 2024?
How might the currency market move in 2024?
Inflationary pressures began to show clear signs of cooling through the second half of 2023, after a few years of steady increases. The Federal Reserve, European Central Bank (ECB) and Bank of England (BoE) now appear at the end of their tightening cycles.
The expectation has grown that the Fed will be the first bank to cut interest rates, with March being the expected starting point. This could weigh heavily on the US dollar if other banks hold fire on cuts.
However, inflation may remain a bugbear for some territories – the UK in particular has seen inflation remain stickier than in other territories. The BoE may be more hawkish in this case, which could bolster the pound at the start of the year.
The UK economy is hanging on tenterhooks at the moment, and continued slowdown in 2024 may undermine Sterling sentiment. Furthermore, this may force the BoE’s hand, and force it to cut rates sooner than currently expected.
While the ECB has sought to play down rate cuts bets, the Eurozone’s economy is stuck in a quagmire. Inflation has cooled significantly too, and the bank’s target of 2% seems in sight.
Ultimately, which ever bank makes the first rate cut is likely to cause weakness in its respective currency in 2024.
Elections are on the horizon in the US, as the 2024 presidential race continues to heat up. Incumbent Joe Biden is likely to once again face off against Donald Trump as a representative of the Republicans.
This could bring substantial volatility in the ‘Greenback’ next year. The uncertainty posed by another Trump administration could spook investors amid concerns over how he might shape US foreign and fiscal policy in a second term.
The UK is also expected to see a general election in 2024. Current polls suggest that Labour is likely on track to claim a majority following some significant set backs for the Conservatives over the past couple of years.
The potential for a change in government could stoke some volatility in the pound, although markets seem generally receptive to a Labour government.
Investors may also keep an eye on Q4 GDP data. While the US economy has shown resilience, the UK and Eurozone economies are on the brink of recession. A slowdown in the last quarter could plunge the UK and Eurozone into a recession, and pile pressure on their respective currencies.
