Currency Outlook Second Quarter 2024

David Grimaldi, Foreign Exchange Sales Consultant

The primary season for the U.S. presidential election was one of the shortest since the 1970s. With two elderly candidates, and one still encountering multiple court cases, there is still the possibility that one, or both, of them will not be there in November. The impact of the dollar on who wins has added increased volatility and costs to businesses that manage their currency exposure. Some experts think a win by former President Donald Trump could result in a stronger dollar due to a return to protectionism and tariffs. Alternatively, Trump promoted lower interest rates for real estate and businesses, and deficit spending has seen a push into other fiat currencies. Overall, the dollar weakness picture has moderated since the first quarter as rate hikes expected have dropped from 5 to 3  in the U.S. In addition, we could see an earlier move in in lower rates by the ECB and the United Kingdom than expected.

EUR/USD Sideways to Bullish

Source: TradingView.com

EUR/USD completed the first quarter as expected, as it has stayed range bound in sideway trading. If you take out the first week of the year, EUR has traded neatly in a 1.0940-1.0700 range.

Since December, rate cut expectations have been pushed out from this past March to this coming June, with only three cuts expected. In addition, ECB President Christine Lagarde has mentioned June rate cuts, which has moved up the expected timeline. Global factors are still a concern, as Middle East developments and expansion of the war with Hezbollah could create a flight to U.S. dollars scenario. Global trade to Europe has already seen an impact in 2024 with routes diverting from the Red Sea, increasing costs for goods. Positioning is neutral for EUR/USD and technically needs a weekly close above 1.0950 for a move back to the yearly highs. Inflation should remain persistent but not at levels that would drive major positioning back into dollars into the summer.

GBP/USD Sideways to Bullish

Source: TradingView

The pound was a strong performer compared to other G7 currencies, but it is at the same levels we opened on the year. Inflation has moderated from the highest levels of 2023 when it reached 11%. The Bank of England (BoE) is looking at cuts to occur starting in August with expectations of between 75-100 bp in 2024. The UK election this year should be dull compared to the upcoming U.S. elections. Wage growth is keeping inflation firmly elevated above the BoE’s 2% target. Overall, I maintain a constructive view on GBP as interest rate differentials should favor the pound as the EU and the U.S. cut rates first. The second quarter should see GBP move to last year’s high near 1.3140. A reversal into dollars would occur on a close below 1.2500.

USD/JPY Sideways

Source: TradingView.com

The USD/JPY made additional gains since January as risk sentiment in equities, which began in October 2023, continued well into March 2024. There has been no intervention to protect the yen above 150, even though the Bank of Japan (BoJ) has made overtures to do so. There have been expectations for the BoJ to end ultra-easy monetary policy that may happen this month. The Nikkei reached its highest levels in 40 years and wage demand is at a 30-year high. My sentiment has changed to sideways, as the U.S. Federal Reserve (Fed) has scaled back expected cuts. Ultimately, the BoJ wins in the battle of protecting its currency, but this may result in a more extended fight to keep the yen below 150. The U.S. economy is proving to either more resilient or the never-ending printing of money is keeping it afloat longer. The money printing issue may or may not be decided on after the U.S. election in November depending on which party wins.

USD/MXN Sideways/Bearish

Source: TradingView.com

Mexico will have a presidential election in June as the Morena AMLO party is the front runner. The futures market is not pricing in significant premium for June or for the November election, which polls show for now favoring former President Trump. USD/MXN has had extraordinarily little to go in to start the year, so it has followed the technical — with the peso appreciating — pushing the dollar lower to key support near 16.65. Below there we should see dollar momentum to the downside. Banxico may look to start an easing cycle March 21, as interest rates sit at 11.25%, and inflation has moderated. This will have minimal effect on the peso going forward, as the focus continues to be on U.S. rate cuts this summer. Illegal immigration has become a hot issue in polling for this year’s U.S. election. If he wins, Trump promises to send troops to the border to prevent migration and fentanyl inflows. The risks are if Mexico is uncooperative, there could be increased regulation on trade and finance between the two countries.