March 2024 - Monthly Economic Outlook

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

What happened to volatility? 

The implied volatility of the principal currency pairs in the foreign exchange market remains low. This has been the case for several months and we do not expect it to change in the near term. There is no trend change to note in the major pairs. The EUR/USD continues to slide. In contrast, the EUR/JPY is solidly anchored on an upward trend given the structural weakness of the Japanese yen. We are neutral on the EUR/GBP, which has moved within a trading range in recent months. But with the US presidential election approaching and geopolitical risk running high, particularly in Europe, a sudden resurgence of volatility in the months ahead cannot be ruled out.

EUR/USD

High: 1.0894  Low: 1.0699 Change: -0.10%

There are no real reasons to be optimistic about the EUR/USD pair. The US economy is likely to outperform its eurozone counterpart. The ISM survey of the US manufacturing sector illustrates a strong recovery in activity and the Atlanta Fed sharply raised its US first-quarter growth forecast to 3.2% from 2.9% in mid-February. While this forecast is highly volatile, it conveys a positive signal. US growth is holding up strongly, despite the depletion of almost all Covid-era savings. The situation is very different in the eurozone. Germany is in recession, growth has stalled and consumer spending will probably not remain resilient for much longer. All this points to an appreciation of the dollar.

EUR/GBP

High: 0.8576 Low: 0.8492 Change: +0.29%

For several months, the EUR/GBP pair has moved within a trading range – sometimes a very narrow one. This is likely to remain the case over the coming months. The money market now forecasts that the Bank of England will cut rates by just 60 basis points this year (versus 75 basis points in mid-February). This will probably give sterling marginal support in the long term. As you have understood, the EUR/GBP is unlikely to be the most volatile pair in March.

GBP/USD

High: 1.2757 Low: 1.2518 Change: -0.41%

In recent weeks, the pair has made several attempts to stage a technical recovery, but these have been fruitless to date. The underlying downward trend continues. A strong and hegemonic dollar continues to attract the lion’s share of inflows. This is not set to change overnight. The GBP/USD pair is currently 6% lower than at the outset of the global monetary tightening cycle at the start of 2022.

EUR/CNH

High: 7.8311 Low: 7.7228 Change: +0.47%

In China, something abnormal is currently underway. The yuan exchange rate has been on a downward trend in recent months but the Chinese central bank’s balance sheet shows an increase in reserves. As a general rule, when the yuan depreciates the central bank’s reserves decrease as it intervenes (by selling assets) to weaken its currency. Some experts think it is Chinese commercial banks, not the central bank, that are intervening directly in the currency market. This is credible. It has happened in the past on Beijing’s orders. In any case, we continue to forecast a slow depreciation of the yuan in the coming months, as this is necessary to revive the economic machine through exports.

EUR/CHF

High: 0.9619  Low: 0.9305 Change: +3.01%

The Swiss National Bank (SNB) delivered a small surprise. Central bank deposit figures show that it intervened in the foreign-exchange market to weaken the franc last January. It is probably still doing so today. But we do not have access to figures to verify this. The Swiss currency’s real effective exchange rate is still close to its record level. This is an uncomfortable situation for the central bank and the country’s export companies, explaining the need to lower the franc’s exchange rate. As such, vigilance remains necessary if you are exposed to this currency.

EUR/CAD

High: 1.4741 Low: 1.4472 Change: +1.21%

When growth slows, inflation usually falls. This is what is now happening at last in Canada. The consumer price index came out at 2.9% year-on-year in January. In the short term, this does not change the situation from a monetary standpoint. The probability that the Bank of Canada will raise its interest rates in March is negligible at just 30%.

EUR/AUD

High: 1.6695 Low: 1.6375 Change: +0.74%

Australia is an economic puzzle at present. There is every reason to believe that inflation will rebound sharply in the country (as is the case in New Zealand), and this could derail the much-expected rate-cutting process. In the short term, Australia is in pause mode. But beware that if the inflation trajectory follows the same curve as in New Zealand, the Australian Central Bank may start talking of rate hikes again (!), as the New Zealand central bank has already done. This would obviously be a support factor for the Australian dollar.

EUR/JPY

High: 163.80 Low: 158.55 Change: +2.07%

In Japan, the fresh spike in inflation has rekindled the debate about a possible rate hike. The consumer price index (IPC) came out at 2.2% year-on-year in January (versus 1.9% forecast by the consensus). Stripping out volatile items, core inflation stood at 2.00%. This is an encouraging performance. However, we increasingly doubt that the Bank of Japan is truly ready to normalise its monetary policy. The money market forecasts a first increase next April. This is not guaranteed. Do not forget that a weak yen (because of cheap money) is a major support factor for the Japanese economy. And it could certainly do with one at present.

EUR/HUF

High: 396.09 Low: 382.34 Change: +3.14%

As we predicted, the Hungarian central bank decided to opt for a more massive rate cut of 100 basis points in February. The publication of the next inflation report in March is set to have a major influence on the magnitude of forthcoming rate cuts. We are hesitating between 75 basis points and 100 basis points at the 26 March meeting. Depending on economic data, the central bank may pause its rate-cutting cycle in June. The EUR/HUF pair has been moving within a range for several months. We do not expect this to change in the near term. The euro maintains the upper hand. But it would be very challenging to breach the threshold of 400.

USD/HUF

High: 364.90 Low: 351.17 Change: +2.50%

Even if consolidation phases are possible, the US dollar continues to benefit from its safe-haven status, the excellent health of the US economy and the high short-term interest rates practiced by the US Federal Reserve. This is not likely to change in the short term. With the Hungarian central bank engaged in a significant rate-cutting process, all this is putting downward pressure on the HUF.

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