We have revised our currency forecasts favouring the USD’s recovery, extending from 1Q into 2Q 2024. Due to sticky inflation and a tight labour market in the US, we now see the Federal Reserve lowering interest rates by 50 bps instead of 100 bps in 2H24. Between 4Q and 3Q 2023, the monthly average for US nonfarm payrolls increased to 276k from 212k, while CPI core inflation firmed to 0.4% MoM from 0.3%. Assuming the PCE deflator on April 26 mirrors the CPI, fewer Fed officials will back the base scenario of three rate cuts this year before next week’s blackout period. On March 20, nine of the 19 Fed officials predicted two or fewer cuts in the dot plot. Hence, we cannot rule out the Fed reducing its projection from three to two rate cuts in June.
That said, history has demonstrated that when the US inflation gauges, especially the PCE deflators, resume their downward path towards the 2% target amid a gradual rise in the unemployment rate, the Fed will turn dovish again. Hence, we have maintained the profile for the greenback to depreciate after 2Q24 based on our forecast for the Fed to lower rates every quarter from 3Q24 through 2025. We do not rule out the first reduction taking place earlier in July vs. the September cut discounted by the interest rate futures. To do so, the next monthly US jobs and inflation reports will need to disappoint for the Fed to prepare for such a move at the June meeting.
Meanwhile, IMF Managing Director Kristalina Georgieva cautioned central banks against easing policy too early and risk a resurgence in inflation and a fresh bout of tightening. Hence, we expect more volatility from other central banks tempering their rate cut guidance, wary that markets are keen to see who would lower rates before the Fed.
Last week, the Bank of Canada warned that lowering rates too soon could jeopardize the progress to bring inflation to target despite not wanting rates to stay this restrictive longer than needed. Having noted that other central banks were cautious about easing monetary policy, the Reserve Bank of New Zealand wanted to keep its official cash rate restrictive for a sustained period to return CPI to target this year. Although the Reserve Bank of Australia shifted from a tightening to a neutral bias, it did not rule “anything in or out” on rates. The European Central Bank was unwilling to pre-commit beyond the rate cut expected on June 12, a decision that still hinges on the next two monthly inflation readings maintaining its downward trajectory.
Global central banks and financial markets will pay close attention to the impact on oil prices from the latest escalation in the tit-for-tat attacks between Israel and Iran. After bottoming at USD72.30 per barrel in mid-December, crude prices surged 25% to USD90 in April. Iran fired hundreds of drones and missiles in response to the attack on its Syrian embassy on April 1, its first direct attack on Israel after decades of shadow war. The US, the UK, and France helped to intercept the missiles. Turkey, Kuwait, and Qatar refused the US to use their airspace for retaliatory attacks on Iran. The United Nations warned that the Middle East was on the brink of a wider war.
Quote of the day
"Peace is not the absence of conflict, it is the ability to handle conflict by peaceful means.”
Ronald Reagan
15 April in history
The Titanic sank in 1912 after striking an iceberg on its maiden voyage.
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