MUFG Foreign Exchange Forecasts For Next 6-12 Months: Update March (2024)

Key Points:

• MUFG forecasts: Weaker US prompts Fed cuts from June.
• Fed cuts to weaken dollar, support Euro.
• EUR/USD to hit 1.14, USD/JPY to 140 by end 2024.
• Pound Sterling fades with BoE rate cuts, GBP/USD to 1.31.
• Commodity currencies strengthen with Fed rate cuts.
• Fed policies vital for emerging-market currencies.

Investment banks have not made significant changes to currency forecasts in the latest updates even though expectations of early US interest rate cuts have continued to fade.

MUFG has also made few changes in their latest update with limited net dollar losses expected over the medium term.

Overall volatility in currency markets has dropped to historic lows. For example, according to the bank; “EUR/GBP 3mth implied volatility dropped to 4%, the lowest since before the Global Financial Crisis. So the question for the month ahead is – what can trigger an upturn in extremely low levels of volatility?”

The bank points to the fact that most central banks will hold policy meetings in March and central bank policies will be crucial over the next few months.

It adds; “The key event of course will the FOMC meeting on 20th March when the policy rate will be left on hold but the focus will be on the guidance and whether the dots profile changes from the three 25bp rate cuts signalled in December. We think the dots will remain unchanged, similar to current market pricing.”

MUFG notes the sharp shift in market expectations of interest rate cuts.

At the end of January, markets were pricing in 148 basis points of cuts in 2024, but this has now dropped to 82 basis points.

According to the bank; “While the extent of rate cuts at the end of January was excessive, the extent of rate cuts now looks a little too cautious.

Although the first rate cut may be delayed until June, it considers five rate cuts totalling 125 basis points are realistic this year with four second-half cuts.

MUFG also sees significant US economic risks; “Optimism over continued US economic resilience is high but we remain sceptical and suspect that certain key tailwinds have been key to the strength of the economy that are about to fade.”

Fiscal policy, for example, will be significantly less supportive.

It does, however, add; “There are limits to dollar selling however with the US election and the prospect of a Trump victory likely curtailing the extent of dollar selling.”

As far as the ECB is concerned, MUFG argues that the central bank should cut rates in April given the overall economic profile.

It does, however, consider that the more likely outcome is for the bank to wait and cut rates in June.

It does, however, see limited scope for Euro gains; “While actual rate cuts delivered will likely be similar, we see some slight improvement in growth in Europe in contrast to slower growth in the US as allowing for some EUR appreciation.”

As far as the Bank of Japan is concerned, MUFG notes that wages growth has been stronger than expected and that this should continue, especially with a declining working population.

Overall, it now expects that the Bank of Japan will end negative interest rates at the March policy meeting and signal further action over the following months.

It adds; “A BoJ rate hike and importantly a signal of potentially more hikes to come will help the yen to recover. For a large sustained move stronger, G10 central banks will also need to embark on rate cutting cycles.

BoE Timing Crucial for the Pound Sterling Outlook

Bank of England (BoE) policies will be a key element for the Pound.

According to MUFG; “underlying inflation pressures remain problematic and coupled with the potential for a moderate pick-up in growth and with the budget in March likely to add further fiscal stimulus, we now see a greater risk of a further delay to the BoE cutting rates.”

The bank’s base case is for a first rate cut in August.

It notes; “Higher wages and sticky services CPI while growth moderately improves should be supportive for the GBP over the coming months.”

It does, however, expect that the Pound will retreat later in the year once the BoE does cut rates with EUR/GBP drifting higher to 0.87 at the end of 2024.

MUFG expects that inflation concerns will mean that the Reserve Bank of Australia will be one of the last major central to start cutting interest rates which should offer some currency support.

China trends will be important and it adds; “If the global economy manages a softish landing, then AUD/USD prospects are good for seeing an eventual break above the 0.7000-level.”

It considers that risks to the New Zealand economy remain to the downside, but caution over rate cuts will support the New Zealand dollar and adds; “we see scope for NZD/USD to advance higher.”

It expects that the Canadian dollar will underperform other commodity currencies as the Bank of Canada acts to ease financial conditions.

As far as the Norwegian krone is concerned, it notes; “A slower start for Norges Bank rate cuts should encourage stronger krone. Developments in the Middle East are having limited impact on the krone but a bigger move in the price of oil remains a risk.”

It sees scope for only limited Swedish currency gains.

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