Currency Outlook Fourth Quarter 2024

By David Grimaldi, Foreign Exchange Sales Consultant

Has there ever been a news cycle experience like the last six months? The East Coast longshoreman strike may have the biggest impact into the November election, but is not getting much notice by the candidates. Some are claiming just a two-week strike could have an impact on shipping for up to six months. Additionally, the impact on shipping containers could raise their costs beyone $20,000 per container.

The Federal Reserve cut rates by 50 basis points (BPS) last month because it believes the labor market is slowing, and did this extreme cut despite inflation not hitting the 2% goal. The U.S. just hit $1 trillion in interest payments and is printing $1 trillion every hundred days. One trillion dollars every hundred days — $35 trillion of debt — buys its citizens 3% gross domestic product (GDP) and that is supposed to be a successful economy.

Getting back to inflation, September oil prices have dropped to the lowest levels in almost three years. This is mostly due to dropping demand in China and increased output from Organization of the Petroleum Exporting Countries (OPEC). Economists have been warning that a Donald Trump presidency could be inflationary for two reasons. One is an increase in tariffs, which could potentially raise prices of goods on consumers.

In reality, $89 billion in tariffs were collected under Trump and $144 billion were brought in under President Joe Biden.1 Vice President Kamala Harris has not given any indication that she would remove Biden’s tariff policy, so I would expect that impact would be similar if either candidate would be elected.

The second reason could be related to the labor market. Since 2019, 1.3 million Americans have lost jobs, while 3 million foreign born workers have gained them.2 If Trump does win the election and potentially deports illegal workers, it will have an impact on increasing job demand and, in turn, raise wages. This will be offset somewhat by the costs incurred federally and locally to support these workers with food, housing, medical and crime.

Harris has presented two ideas we know are potentially inflationary: rent and food price controls. The Harris plan would impose federal rent control nationwide and would likely raise taxes on housing providers who don’t adhere to these controls. Fees would similarly be levied on food providers who the federal government determines are engaged in price gouging. Decades of economic research by progressive and conservative thinktanks has proven that rent and food controls always lead to less supply and the driving up of prices for both. Oil will be the key for inflation in the U.S. Harris is campaigning for a 50% reduction in fossil fuels by 2030 without having a cheaper alternative, while Trump promises to drill, drill, drill.

By 2025, we could be looking at a $40 oil cost per barrel if Trump is elected or $100 if Harris is in the White House.

EUR/USD Bullish

The European Central Bank (ECB) cut the deposit facility rate by 25 BPS to 3.5% easing monetary policy in September. Europe hit a 14-month high reacting more to Federal Reserve rate cut of 50 BPS. Usually lower rates in the U.S. mean less investment in dollar assets, resulting in less demand for dollars. Forecasters are looking for two additional cuts this year for the Eurozone. EUR/USD is approaching a key area of 1.1250 which could trigger a test of 1.1400. There are tail risk events that could see some move back to dollars.

Canadian Prime Minister Justin Trudeau says he fully backs Ukraine using long range weapons into Russia. Russian President Vladimir Putin explicitly said this will mean World War III. Additionally, Israel’s attacks on Hezbollah with exploding pagers and walkie talkies, resulting in deaths and injuries, will almost certainly expand the conflict north. Former President Trump has had two assassination attempts and supposedly five active cells looking to finish the job. All of this with a polarizing election in under 40 days to go. Risk events will mean a pullback to dollars, but technical and interest rate cuts mean a stronger EUR.

GBP/USD Bullish

The British pound sterling (GBS) shook off a move to 1.3000 last month, rising above 1.3400 to highest levels in two and a half years. Growth in the United Kingdom (U.K.) continues to be weak, around 1% year over year. Inflation has moderated toward the 2% goal, even with only one 25 BPS cut so far for the Bank of England. Sterling has remained strong and looks to target key 1.3750 resistance, as the central bank has taken a more gradual path to lowering rates. The U.K. has changed to the Labour Party for the first time in 14 years. The challenges it faces include a slowing economy, the Ukraine War, Brexit and a general social malaise. The U.K. experienced higher levels of inflation than the U.S. and Eurozone, so it seems to maintain a cautious path on rates, which should keep the pound strong.

USD/JPY Bearish/Sideways

The Bank of Japan is probably relieved to get the Fed cut rates. The initial fallout from the Japan rate hike saw a global unwind of the yen carry trade, which is something that it doesn’t want to revisit unless it is completely necessary. Once the Bank of Japan (BoJ) gets involved in intervening in protecting the yen, is is usually right, and the yen strengthens (don’t fight the Fed also applies to the BoJ). The yen has gained almost 14% versus the dollar since July, giving back all the gains of 2024. There could be additional gains to 131 medium terms, but the U.S. 10-year yield has stabilized, giving some support to the dollar. The market now expects two more cuts this year in the U.S. and will most likely price in three if there are significant signs of recession. September Consumer Price Index (CPI) In Japan fell to 2%, giving the BoJ another reason not to raise rates. Shigeru Ishiba was picked as prime minister, bringing a support for military strength in the region versus Chinese interests and boosting support for yen appreciation.

AUD/USD Bullish

AUD/USD is up almost 4% in three weeks as dollar weakness has broadened after the Fed cut rates in the U.S. by 50 BPS. The dollar index DXY is nearing key yearly support at 99.60, which if it breaks, could lead to further dollar losses. The Australian economy is heavily dependent on the Chinese economy so AUD is surging on news that China will be more accommodative on monetary policy. President of the People’s Republic of China Xi Jinping and the Politburo gave few details, but markets were boosted by promises to support the faltering real estate market. The People’s Bank of China cut interest rates and lowered rates for existing mortgage holders. It remains to be seen how long lasting these moves will support sentiment, which has suffered the last few years as the real estate market experienced losses. The RBA has remained vigilant on rates despite other G7 countries cutting rates. It maintained inflation remains high so have kept rates at 4.25% for the seventh straight meeting.