January 2024 - Monthly Economic Outlook

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

2024: farewell to the dollar?

The US dollar is set to fall in 2024. This is what sell-side analysts at the major banks are forecasting. They are betting the European economy will outperform its US counterpart, leading to the recycling of capital flows in Europe, in turn boosting the euro. We are sceptical. Over the past two years, the eurozone has been on the verge of recession, whereas the US economy has been amazingly dynamic, in large part as a result of the public spending boom (the budget deficit stands at 7% of GDP). We struggle to see how this situation could be reversed in 2024. And sell-side analysts are alone in predicting a structural decline in the dollar. This is not at all the scenario of asset managers and hedge funds, and it is not ours either.

EUR/USD

High: 1,1124  Low: 1,0723 Change: +0,78%

In our view, the market is too pessimistic about the US dollar and the euro is overvalued relative to economic fundamentals. We think the optimal EUR/USD exchange rate is 1.05. While we doubt this will be attained in the very short term, it is a reasonable target for the first quarter, especially if the ECB acts before the Fed. Moreover, if the US economy outperforms the eurozone, as we think likely, capital flows into the US will probably increase. This is a structural factor that should boost the dollar over the long term. We are consequently highly sceptical about the forecasts of some economists and analysts who expect the US dollar to enter a long downward cycle because of the country’s falling productivity, the economic slowdown and the dedollarisation process. These arguments do not hold up in our view. Some are even factually incorrect. Recent data show that US productivity is rising. This is a surprise, but it is precisely what is happening.

EUR/GBP

High: 0,8717 Low: 0,8521 Variation : +0,79%

The Bank of England has failed to convince the currency market that it is not ready to pivot in the near term – in other words, to adopt a monetary policy of rate cuts. The money market continues to forecast four rate cuts in 2024. We think this is credible. In the short term, however, the UK currency is likely to benefit from the BoE’s hawkish tone. A new test of the 0.8550 zone appears possible to us.

GBP/USD

High: 1,2804 Low: 1,2502 Change: -0,04%

The GBP/USD pair ended 2023 fairly stable. Sterling rebounded at the beginning of December, with the market betting on a forthcoming rate cut by the US Federal Reserve, which automatically sent the US dollar tumbling. But we are sceptical about sterling's ability to outperform the dollar over the long term in an environment that is increasingly marked by risk aversion, as we have seen in early trading at the start of this year with the tensions in the Red Sea.

EUR/CNH

High: 7,9420 Low: 7,7083 Change: +0,44%

Those betting on a massive Chinese stimulus are set to be disappointed in 2024. The Central Economic Work Conference, held in Beijing in early December, set out two economic priorities: no increase in public spending and very modest tax cuts limited to the high tech and manufacturing sectors. At the same time, China wants to keep its currency stable at any cost. We therefore expect the EUR/CNH to stay between 7.70 and 7.90, at least in the short term.

EUR/CHF

High: 0,9657  Low: 0,9257 Change: -1,47%

The Swiss National Bank said in mid-December that it is no longer “focusing on foreign currency sales”. It considers that “monetary conditions are adequate” today. This is a major change of paradigm by the central bank, implying it is comfortable with the current EUR/CHF exchange rate.

EUR/CAD

High: 1,4929 Low: 1,4549 Change: -0,61%

In December, the Bank of Canada left interest rates unchanged, as expected. It acknowledged that higher interest rates “are clearly restraining spending” and inflation is falling faster than expected. While this is good news, it does not rule out a final rate hike by the central bank in the first quarter as a precautionary measure. In theory, this is positive for the Canadian dollar, but do not forget that other external factors must be considered (such as the health of the US economy). 

EUR/AUD

High: 1,6604 Low: 1,6167 Change: -0,64%

We think the end of the monetary tightening cycle in Australia is imminent because of the weakness of economic growth, slowing wage growth and a disinflation process well underway. But a final rate hike just in case is still possible in February, raising the policy rate to 4.6% on our estimates. In theory, this would be positive for the AUD.

EUR/JPY

High: 162,26 Low: 153,20 Change: -1,93%

Unsurprisingly, the Bank of Japan left its monetary policy unchanged in December. But we noted a significant shift of tone that opens the door to a rate hike at the start of 2024. A word of warning: this is by no means certain. This scenario has been mooted for some time but has still not materialised. If it does happen, however, it would obviously be good news for the Japanese yen.

EUR/HUF

High: 385,74 Low: 376,77 Change: +0,26%

This has been a turbulent year for Hungary. We expect the Hungarian central bank to accelerate the easing cycle in early 2024 by shifting from 75 basis point to 100 basis point rate cuts, potentially as soon as January. This comes at a time when Hungary’s economy is still comatose. From an FX perspective, we doubt the EUR/HUF will be capable of climbing above the 400.00 threshold for an extended period in 2024. In the near term, we expect it to range between 370 and 390.

USD/HUF

High: 357,03 Low: 342,29 Change: -0.61%

The USD fell by more than 7% against the HUF in 2023. The dollar’s decline does not reflect renewed confidence in the HUF but rather expectations of rate cuts by the US Federal Reserve in 2024. Since the currency market foresees a pivot on the US side, this automatically leads to a drop in the US dollar and the yield on all dollar-denominated assets. However, we doubt that the greenback’s depreciation will be lasting.

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