May 2024 - Monthly Economic Outlook

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

Kerplunk! 

A few months ago, the currency market was predicting six to seven rate cuts by the US Federal Reserve (Fed). Today, just one cut in November is priced in by the money markets. Why? Because inflation remains stubbornly high, especially in services. The looming decoupling of interest rates between the two sides of the Atlantic could spell a period of monetary disorder. This can already be seen in Asia. By maintaining high policy rates, the Fed is creating the conditions for a structural appreciation of the US dollar, and hence a depreciation of other currencies. Some central banks are being forced to implement emergency rate hikes. Others, such as the Bank of Japan (BoJ), are opting for direct interventions in the currency market.  

EUR/USD

Haut: 1,0863  Bas: 1.0601 Variation: -0.38%

There is no longer much doubt today that the European Central Bank (ECB) will kick off the rate-cutting cycle before other large developed economies. This is set to take effect next month. There are growing arguments for a rate cut. Inflation is falling, the wage-price spiral is being deflated rapidly and growth is showing signs of recovery (and therefore needs supporting!). In view of economic trends in the EU, we expect the ECB to lower rates in both June and July (-25 basis points each time). This could fuel a further depreciation of the euro.

EUR/GBP

Haut: 0.8647 Bas: 0.8528 Variation: +0.01%

Still fairly few fluctuations by this pair. The Bank of England (BoE) is likely to leave rates on hold at its meeting this Thursday. But it will be interesting to see how the votes break down as the market is still unsure about the timing of the first rate cut. This could be any time between June and August. The advantage of a June cut is that this would permit coordination with the ECB and the Bank of Canada. Of the nine members of the BoE’s monetary policy committee, we think seven will vote to leave interest rates unchanged and two will vote for a 25 basis-point rate cut (Dhringa and deputy governor Ramsden). 

GBP/USD

Haut: 1,2710 Bas: 1.2299 Variation: +0.34%

In recent months, we have seen a close correlation between the GBP/USD pair and the one-year GBP vs USD swap differential. If this differential were to widen by around 50 basis points in favour of the dollar, for example, we think the GBP/USD pair could return rapidly to the 1.21 zone.

EUR/CNH

Haut: 7.8720 Bas: 7.7039 Variation: -0.85%

Many market operators continue to forecast an aggressive depreciation of the yuan. This does not appear credible to us in view of the change in the Chinese central bank’s currency reserves. On the contrary, it seems that Beijing wishes to curb the currency’s depreciation by buying yuan in the market. The objective is to boost monetary stability and hence avoid fuelling capital flight. 

EUR/CHF

Haut: 0,9837  Bas: 0.9682 Variation: +0.46%

Few fluctuations by the EUR/CHF pair, which continues to hover around 0.97 – a level that seems to satisfy the Swiss authorities today. In the medium term, we think the pair has a good chance of returning to parity, probably before the end of the year.

EUR/CAD

High: 1.4750 Low: 1.4546 Change: +0.60%

The pair has continued to move within a range of between 1.4600 and 1.4750 over the past three months. This situation is unlikely to change in the near term, especially as there will almost certainly be a form of monetary policy coordination between the ECB and the Bank of Canada.

EUR/AUD

Haut: 1.6682 Bas: 1.6291 Variation: -1.24%

This is the pair to watch closely in the months ahead. Against all expectations, the Reserve Bank of Australia could raise its policy rates again to head off persistent inflation. This scenario looked totally far-fetched only a few weeks ago. Rabobank, for example, is now forecasting two additional 25 basis point rate hikes in August and November. This would raise the principal policy rate to 4.85%. If this happens, the Australian dollar is likely to appreciate against its principal counterparties.

EUR/JPY

Haut: 171.62 Bas: 162.27 Variation: +1.17%

Japanese authorities intervened directly in the FX market twice this week, on Monday and Wednesday. On both these occasions, the central bank took advantage of a public holiday, when there is less liquidity, to buy currency. On initial estimates, Japan spent around 5,500 billion yen on Monday and around 3,600 billion yen on Wednesday. This may appear substantial. But the BoJ has a lot of firepower. It could continue intervening for a long time to come if it so wishes. The problem is the lack of coordination with US authorities. In the past, only coordinated interventions between Tokyo and Washington had a lasting impact on the exchange rate, as in the 1990s. At present, this is not the case and no such coordination is on the agenda. This means the yen’s underlying downward trend is unlikely to be reversed for an extended period.

EUR/HUF

Haut: 396.01 Bas: 388.45 Variation: -1.30%

The EUR/HUF pair has little prospect of breaking through the strong resistance line at 400. Even if the eurozone economic climate improves, this will surely be insufficient to enable the single currency to test this price level. On the macroeconomic front, wage growth is still running in double digits in Hungary according to February figures. This is problematic and will likely prompt the Hungarian central bank to plan fewer rate cuts than expected.

USD/HUF

Haut: 373.25 Bas: 357.45 Variation: -1.11%

A small depreciation of the US dollar, but this will surely be short-lived. The outlook for continued high interest rates in the US, whereas Hungary is in a rate-cutting process, continues to favour the US dollar in the medium and long term. Institutional investors still have massive long positions in the greenback and this is not about to change overnight.

Economic Calendar