Forex fundamentals unpacked: Decoding the drivers of major currency movements

This report looks at the recent performance and future outlook for the major currencies, including the US Dollar, Euro, British Pound, Japanese Yen, Swiss Franc, and Canadian Dollar. The report examines the key factors influencing each currency, such as economic data, central bank policies, and geopolitical risks, to offer traders a comprehensive understanding of the current forex landscape. With a focus on factual data and objective analysis, this report aims to equip traders with the insights necessary to navigate the evolving currency markets in the weeks ahead.

US Dollar

The US Dollar has experienced a mixed performance over the past five weeks, influenced by evolving expectations about the Federal Reserve's monetary policy stance and the trajectory of inflation. The currency has faced some downward pressure as market participants increasingly anticipate interest rate cuts later this year, following softer US labour market data and dovish signals from several Fed officials. However, the dollar has also found support from hawkish remarks by Minneapolis Fed President Neel Kashkari, who indicated that the central bank may need to maintain rates at their current level for an extended period until clear evidence of disinflation emerges, not ruling out potential hikes if inflation re-accelerates.

Looking ahead, the US Dollar's outlook remains nuanced, with the currency likely to be influenced by a range of factors, including incoming economic data, central bank policy decisions, and global risk sentiment. While the market's expectations for Fed rate cuts in the latter half of 2024 may limit the dollar's upside potential, the currency could still find support if inflation proves more persistent than anticipated or if geopolitical tensions escalate, prompting safe-haven demand.

Euro

The Euro has exhibited a modest appreciation against the US Dollar over the past five weeks, supported by a gradual economic recovery in the Euro Area and the European Central Bank's (ECB) persistent hawkish stance in the face of elevated domestic price pressures. Despite acknowledging a decline in inflation and easing wage growth, the ECB has maintained its benchmark interest rate at a record-high level of 4.5% for the fifth consecutive month, emphasising the need to anchor inflation expectations and ensure a steady return to the 2% target.

Looking ahead, the Euro's outlook remains nuanced, with the currency's performance likely to be influenced by a range of factors, including incoming economic data, the ECB's monetary policy decisions, and global risk sentiment. While the market anticipates a gradual easing of the ECB's monetary policy stance in the coming years, the timing and pace of this shift will depend on the central bank's assessment of inflationary pressures and overall economic conditions in the Euro Area.

British Pound

The British Pound has faced some downward pressure against the US Dollar over the past five weeks, influenced by a mixed economic outlook, lingering inflationary concerns, and the Bank of England's cautious approach to monetary policy. Despite a gradual easing in wage growth and inflation, the UK economy continues to grapple with persistent labour market tightness, weak retail sales, and affordability challenges in the housing sector. The Bank of England maintained the Bank Rate at 5.25% during its March meeting, deviating from market expectations of a more hawkish stance, as policymakers remain committed to anchoring inflation expectations and ensuring a sustainable return to the 2% target.

Looking ahead, the Pound's outlook remains nuanced, with the currency's performance likely to be influenced by a range of factors, including incoming economic data, the Bank of England's policy decisions, and global risk sentiment. While the market anticipates a gradual easing of the Bank Rate in the coming months, the pace and timing of such reductions will depend on the balance between inflationary risks and economic growth considerations.

Japanese Yen

The Japanese Yen has faced significant depreciation pressures against the US Dollar over the past five weeks, primarily driven by the widening interest rate differential between the two economies. Despite the Bank of Japan's (BoJ) landmark move to end its eight-year negative rate policy and deliver the first rate hike since 2007, the central bank has maintained a relatively accommodative stance compared to the US Federal Reserve. The BoJ kept its key short-term interest rate target at around 0% to 0.1% during its April meeting, while revising its core consumer price index (CPI) forecast for fiscal year 2024 upward to 2.8%.

Looking ahead, the Japanese Yen's outlook remains challenging, with the currency likely to face continued downward pressure against the US Dollar. The stark interest rate differential between the two economies is expected to persist, as the US Federal Reserve maintains a relatively hawkish stance while the BoJ remains cautious in its policy normalisation.

Swiss Franc

The Swiss Franc has exhibited strength against the US Dollar over the past five weeks, supported by the Swiss National Bank's (SNB) decision to cut its key policy rate by 25 basis points to 1.5% on 21 March 2024. This move, which marked the first rate reduction in nine years, was facilitated by the effective fight against inflation, with the inflation rate falling within the SNB's target range of 0-2% for nine consecutive months. The central bank's revised inflation forecast, projecting average annual inflation at 1.4% for 2024, 1.2% for 2025, and 1.1% for 2026, indicates that reduced inflationary pressure has provided room for monetary policy easing.

Looking ahead, the Swiss Franc's outlook appears relatively stable, with the currency's performance likely to be influenced by the SNB's cautious approach to monetary policy, the evolution of inflationary pressures, and the franc's real appreciation. The current economic data suggests that the Swiss economy is experiencing moderate growth, supported by a resilient services sector but tempered by challenges in the manufacturing industry and weak external demand.

Canadian Dollar

The Canadian Dollar has experienced a mixed performance against the US Dollar over the past five weeks, influenced by evolving expectations about the Bank of Canada's monetary policy stance, recent economic data releases, and global risk sentiment. The currency has found some support from the broad weakness in the US Dollar, driven by weaker US labour data reinforcing views that the Federal Reserve may implement its first rate cut in September. However, recent Canadian data has also fuelled expectations of an earlier rate cut by the Bank of Canada, with the manufacturing PMI contracting for the 12th straight month in April and the economy showing signs of slowing growth.

Looking ahead, the Canadian Dollar's outlook remains nuanced, with the currency's performance likely to be influenced by a range of factors, including incoming economic data, the Bank of Canada's policy decisions, and global risk sentiment. While the market anticipates a potential rate cut by the Bank of Canada in the near term, the timing and magnitude of such a move will depend on the central bank's assessment of economic conditions and inflationary pressures.