According to Danske Bank, the Federal Reserve (Fed)'s Quantitative Tightening (QT) policy, which has been secondary to rate hikes over the past year, will likely come into focus as the Fed has likely concluded its rate-hiking cycle, and a solution to the debt ceiling clears the way for a cash balance rebuild.

The bank suggests that there is still a long way before liquidity conditions become tight and expects QT to continue well into 2024. Danske does not anticipate any constrains on the continuation of QT from bond market implications, reserves holdings by banks, or the liability side of bank balance sheets.

The bank also forecasts that the Fed will likely wait for firm upward pressure on overnight rates or for banks to start using standing repo facilities before resorting to 'organic balance sheet growth'.

Danske also notes that banks may begin to feel the pressure as reserve balances start to fall sharply, potentially driving up repo rates and impacting the front end of the EUR/USD basis curve. The bank suggests that tighter USD liquidity conditions in the coming year could push EUR/USD spot lower towards their 12-month forecast of 1.03.