Synopsis: BNP Paribas (BNPP) anticipates a downtrend for the US Dollar (USD) in 2024, supported by various macroeconomic factors and market expectations. They provide forecasts for the Euro (EUR/USD) and the Japanese Yen (USD/JPY) for the end of the year.
USD's Initial Strong Start in 2024:
- The USD began 2024 on a strong note, attributed to position squaring and some data exceeding expectations.
Shift in Focus to Labor Market:
- With core Personal Consumption Expenditures (PCE) nearing the Federal Reserve's target, attention will shift to the labor market, part of the Fed's dual mandate.
Market Sensitivity to Employment Data:
- Markets are expected to react more to weaker employment data, validating the current pricing of the Fed's policy path and potentially leading to more rate cuts being priced in.
Fed's Potential Preemptive Rate Cuts:
- The Fed might cut rates before a significant economic downturn to
achieve a soft landing. This approach could remove the USD's safe-haven appeal that typically leads to its rise during economic slowdowns.
Impact of Narrowing Interest Rate Differentials:
- As the Fed reduces rates, the narrowing interest rate differentials between the US and other economies could weigh on the USD.
Structural Bear Market for the USD:
- Given the USD's overvaluation relative to its long-term fair value and global investors' overweight position in US assets, BNPP views the USD as being in a structural bear market.
EUR/USD and USD/JPY Forecasts for End of 2024:
- BNPP forecasts EUR/USD to reach 1.15 and USD/JPY to fall to 135 by the end of 2024.
Conclusion: BNPP's analysis suggests a continued downtrend for the USD throughout 2024, influenced by the Federal Reserve's policy shifts, labor market dynamics, and global investment trends. Their predictions for EUR/USD and USD/JPY reflect these
factors, with expectations of a weaker USD against both the Euro and the Japanese Yen by the end of the year. This outlook underscores the significance of labor market data and central bank policies in shaping currency market trends in 2024.