State of play in the currency market ahead of 2024 

The past year has seen significant currency volatility, as surprisingly sticky inflation, rising interest rates, and global geopolitical events have all rocked markets. 

Most key central banks are set to start cutting interest rates next year, which is likely to act as a key catalyst of movement in the currency market. However, there are plenty of other high-impact events on the horizon, including elections in the UK and US, economic uncertainty, and rising geopolitical tensions, which could also influence the market. 

What’s the current state of play? 

One of the driving factors behind most currency movement this year has been down to monetary policy. Early in 2023, it looked as though the world’s major central banks had finished their rate hiking cycles. 

However, inflation proved far more persistent than most economists expected, spurring policymakers to press ahead with further tightening. 

The pound was one of the main beneficiaries of this, as UK inflation has been particularly sticky. GBP struck a 15-month high against USD and a one-year high against EUR in the summer. Although Sterling shed these gains, it remained up overall on the year. 

Of the major currencies, the US dollar saw perhaps the most volatile trade. It looks set to end 2023 weaker overall, after the Federal Reserve signalled multiple rate cuts next year. 

A shifting appetite for risk counted for some of the turbulence in USD, due to its status as a safe-haven currency. 

While hopes of an end to interest rate hikes have provided some cheer, the horrifying eruption of violence in the Middle East and fears of a wider regional conflict have kept risk appetite in check. 

Moving into 2024, GBP and EUR are generally in stronger positions, while USD and CAD are weaker. Risk-sensitive currencies, such as AUD and ZAR are also lower amid the challenging global outlook. 

What to expect next year? 

Interest rate cuts 

Unless there is another inflation shock (such as a spike in oil prices due to an escalation of violence in the Middle East), the world’s central banks are expecting to slash interest rates next year. 

At the time of writing, many see the Fed being one of the first to cut rates, with markets pricing in a 65% probably of the first cut coming in March. 

In contrast, many economists see the Bank of England (BoE) not cutting rates until August, and some European Central Bank (ECB) policymakers have signalled that it won’t unwind policy until the second half of 2024. 

The current expectations would likely see USD weaken in early 2024, with EUR and GBP holding stronger until the second half of the year. 

However, there are many uncertainties around the future of monetary policy. It’s highly unlikely that everything will play out as expected, and we could see notable volatility as markets adjust to new data and developments. 

Elections 

The next year also brings some big political events, including a UK general election and the presidential elections in the US. 

In December, UK Prime Minister Rishi Sunak confirmed that Brits would take to the polls in 2024. Many now expect a general election to take place in May or October, with Labour currently leading the polls by a wide margin. 

UK politics had a considerable impact on the pound last year, amid the dramatic downfall of Boris Johnson, the leadership contest, and Liz Truss’s ‘mini-budget’. This year, it has been somewhat less of a factor under the relative stability of Sunak. 

GBP may see volatility in the run-up to the election, due to uncertainty and market repositioning. An expected Labour victory could be positive for the pound, with a recent Bloomberg poll showing that two-thirds of finance professionals believe a Labour government or Labour-led coalition would be the ‘most market-friendly outcome’. 

However, whoever takes power will have the herculean task of bringing the UK back to sustainable growth without stoking inflation. Any post-election optimism could be short-lived. 

While the UK election will impact just the pound, the US election could have far wider implications. 

Despite facing 91 criminal charges, Donald Trump is the frontrunner to become the Republican nominees. If Trump regains the presidency, the uncertainty of his foreign policy could trigger significant volatility. 

Geopolitical tensions 

We have seen a marked rise in geopolitical tensions over the past couple of years and 2024 looks to be no different, as the war in Ukraine enters its third year and the situation in Gaza continues to deteriorate. 

There’s the potential for both conflicts to escalate in the new year. Which in addition to the horrifying humanitarian cost, could also have widespread economic impacts, such as driving up energy prices and reigniting inflationary pressures. 

Aside from this, 2024 also brings the potential for new trade disputes, sanctions, and political conflicts to create further tensions. For instance, the US ban on chip exports to China  

This could see investors increasingly seek shelter in safe-haven currencies like the US dollar, Japanese yen, or Swiss franc. Conversely, currencies from countries directly involved in geopolitical tensions may face increased volatility and potential depreciation. 

Currencies Direct 

If you have any concerns about how potential currency volatility could impact your business in 2024 then you might want to consider how you can limit your FX exposure. 

At Currencies Direct, not only can we offer you different transfer solutions, such as forward contracts, but we’re also able to give you specialist support and expert insights. 

As a Currencies Direct customer, you can choose how you send money. Simply log in through the app or online to transfer funds 24/7 at highly competitive exchange rates, or give us a call for more detailed guidance. 

You’ll have your very own dedicated account manager who will take the time to understand your business and provided tailored support. We’ll also keep you up to date with market insights from our analysts, and you can set rate alerts. 

If you want to find out more about how Currencies Direct can help your business, such as with forward contracts to lock in favourable rates, simply get in touch.