Outlook 2024: More commotion than motion in foreign exchange markets

Prepare for anaemic global growth and geopolitical turbulence

The 2024 global economic outlook is less than stellar. Enormous growth, macroeconomic policy and geopolitical uncertainties pervade the outlook and foreign exchange markets. How this plays out is anybody’s guess.

Global growth will be weak, if not stagnant in 2024, falling from 2023’s modest pace. Solid US growth propped up the global economy last year, but the US outlook in 2024 is considerably weaker. Most buy into the US soft landing story, though contractionary forces are present and growth will be well below potential.

The euro area, now bordering on recession, faces stagnation. Germany’s mistaken and ill-considered return to the ‘debt brake’ will reinforce weakness.

China may be able to reach 5% growth if authorities turn on the spigot, but a persistent lack of consumer confidence and animal spirits, in large part due to housing woes and debt – plus longer-term demographics and a broken growth model – cloud the outlook. Japan had a good 2023, but it will slow sharply.

Outside of India and a few Asian emerging markets, the rest of the world will reflect the languishing growth picture. South America will be held back by persistently weak productivity growth and muted commodity prices.

Inflation’s ‘last mile’

Inflation and central banks as always will garner obsessive attention. The US and euro area are seeing faster inflation declines than expected and 2% targets may already be in sight.

In the US, some analysts argue that wage growth and sticky services prices will make the ‘last mile’ from 3% to 2% inflation a hard and protracted slog. Others are doubtful. Normalising supply chains, slowing growth and credit, plus falling oil price and rent inflation may support the more sanguine camp.

Market pricing is far ahead of the Federal Reserve in terms of expected 2024 rate cuts and their start date. The last dot plot pointed to a 75-basis point reduction in the Fed Funds rate, but markets are pricing in 150bp. Regardless, Fed Chair Jerome Powell seemingly turned into a cheerleader for accommodation at the last Federal Open Market Committee meeting in December. The Fed’s ‘pivot’ and sharp declines in yields since November reinforce the case for a soft landing.

The euro area’s high 2022-23 inflation outturn mirrored a strong supply side shock emanating from Russia’s war against Ukraine and the ensuing energy price surge. That shock is largely overcome. In contrast with the US, given the euro area’s stagnant growth, it could hardly be argued that demand pull forces were jeopardising the inflation outlook, despite unconvincing efforts partly making that case. Fears that wage gains would become embedded in second round cost-push price pressures have proven overblown. Yet, to promote compromise, especially with Teutonic voices, the European Central Bank overdid its massive rate hiking campaign and may have to row back quickly.

The Bank of Japan is surely set to end its negative deposit rate and loosen yield curve control this year, but when and how tentatively are unknowns.

Chinese deflationary forces are another tailwind for lower global inflation. Regardless, the People’s Bank of China will continue to avoid significant policy rate action. Authorities may, however, vacillate in using credit allocation from time to time as a quasi-fiscal support.

Geopolitical turbulence ahead

Geopolitical unknowns cast a fog over the 2024 outlook. US presidential elections and the possible return of Donald Trump are one clear threat to what remains of the rules-based international order. But even before US elections close in on the endgame, Russia’s war against Ukraine could go through twists and turns, especially as an inept US legislative branch may shamefully block funds needed for Ukraine’s survival. Ronald Reagan must be turning in his grave at the sight of Republicans de facto backing Vladimir Putin.

Congress may threaten to shut the US government down again, sowing more doubt on whether the US can behave responsibly and be a trustworthy global steward. Stressed US-China relations could further raise military tensions, propelling fragmentation and protectionism. Developments in the Middle East risk sending oil prices surging.

Foreign exchange markets may be characterised by hand-wringing and more commotion than motion in 2024. My standard disclaimer applies – forecasting foreign exchange movements is a fool’s errand. In mid-2023, my outlook was for the dollar to largely range-trade with a weakening bias. That outlook looked poor amid a blistering US third quarter, but the US rate rally since November in the nick of time barely bailed that projection out, though perhaps not the ‘weakening bias’ part.

For 2024, both the Fed and ECB will cut, but US yields may fall nominally more than those in Europe, helping the euro to remain broadly unchanged against the dollar or edge slightly higher. Minuscule Japanese withdrawal of accommodation will boost the yen. Narrowing dollar/renminbi rate differentials should bolster the renminbi, as should China’s strong manufacturing trade surplus – which could also galvanise intensified global protectionist pressures – though low confidence and capital outflow will limit renminbi gains. The Canadian dollar and Mexican peso are roughly a quarter of the dollar’s trade weighted index, and they may trade narrowly against the dollar.

On balance, foreign exchange market participants will have much turbulence to wring their hands over, particularly a flurry of central bank rate shifts and geopolitical volatility. But through it all, the dollar’s broad trade-weighted value may not change significantly over 2024, perhaps weakening modestly.

Amid anaemic growth, 2024 may bring many surprises and bouts of volatility.

Mark Sobel is US Chair of OMFIF.

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