Navigating Forex in 2024: It’s About More than Central Banks Cutting Rates

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Forex is the world’s largest and most liquid trading market, with trillions in daily volume. It is, of course, too vast and varied to make generalizations: Issues that impact the Canadian dollar may not be relevant to the Argentinian peso, for instance. However, when we look back on 2023, there are certain important narratives that impacted the forex markets, including:

  • Inflation and Central Bank Rate Hikes in H1
  • Cooling Inflation and Central Bank Pauses in H2
  • Strength in the USD across Q2 and Early Q3 (Risk Off)
  • Weakness in the USD in Q4 (Risk On)
  • An Assertion that the Chinese Yuan and BRICS currencies could compete with USD

Rate Cuts Will Be a Major Focus in 2024

The above represents only a small part of the narrative, but the biggest talking point among forex traders was the decisions of central banks. As stated, it was characterized by rate hikes in the first half of the year, with most central banks in the world’s major economies opting to pause in H2. For example, the Bank of Canada started its hiking cycle in March 2022, reaching 5% by the summer of 2023, and has since paused for three consecutive months.

Now, an important part of the cycle is that it has been fairly predictable. Market predictions on the BoC, Fed, ECB, and Bank of England were pretty accurate throughout 2023, so forex traders were, by and large, able to pounce on interest rate decisions before they happened. Having a strategy to trade forex that took into account these hikes and pauses could have paid off. Of course, there are other factors, and a currency is not guaranteed to rise in value if a central bank hikes or falls when it cuts. But as we said above, we are forced to speak in generalizations. Generally, what forex markets have pointed to is rate hikes being positive for a currency.

External Factors Will Play a Role

Nonetheless, the narrative as we head into 2024 is going to be an interesting one for forex traders. In short, the big bet is about predicting which major central banks will cut first. And we would argue this is going to be a lot more uncertain than predicting the cycle in 2023. Indeed, we have already noticed this in market activity during central bank meetings: In recent months, the market has been more reactive to the speeches of central bank speakers than it has to the policy announcement itself. Why? Because traders are looking for clues – hawkish and dovish tones – on what comes next, i.e., when and how deep the cuts will be.

To give you an example of what we mean, consider how Deutsche Bank is predicting pain for GBP in the late spring. Deutsche Bank believes the Bank of England will be one of the first central banks to blink, predicting that will come in May, with a bloodbath in GBP pairs to follow. Deutsche Bank’s argument is that the UK’s economy will suffer more than its peers, forcing the Bank of England to start cutting earlier. Yet, here’s the problem for forex traders betting against the British pound – there is no guarantee that Deutsche Bank’s prediction will come true. Moreover, when you consider it is forecasting that other central banks will start cutting in the summer, you can see that the margin for error is tight.  

However, there is a broader issue at play here. As stated earlier, it was (relatively) easy to predict when and how central banks would hike and pause across 2022 and 2023. The reason for that was that it was based on one factor: inflation. But when we look to 2024 and beyond, wider economic factors will come into play alongside inflation, including the housing market, GDP growth, and the prospect of recession. This puts us into a potential scenario where inflation starts rising again, but central banks cut to save the economy or the housing market.

A Wild Ride Lies Ahead

The point, as such, is that forex could be somewhat more unpredictable in 2024 as there are likely to be more external factors at play. Now, just because it is unpredictable does not mean there will be a lack of opportunity – far from it. The conditions we are describing may bring volatility, and that can be a boon for forex traders. Yet, they should be aware that 2023 was all about focusing on the actions of central banks, whereas 2024 may not. Recessions, general elections (US, UK, Brazil, India, Indonesia), housing crises, a global debt crisis, and more could be on the cards. Traders should buckle up for a wild ride.

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