Forex – what will playing the market look like in 2024?
The forex market is constantly changing and 2024 will be no different. We outline how playing this market will change in the near future.
How will the forex industry change in 2024?
This year, the foreign exchange market was heavily influenced by the coronavirus pandemic. Currencies were often bought and sold based on traders’ desire to increase or decrease their exposure to riskier assets, rather than individual motives. In 2024, traders’ attention will slowly shift towards individual fundamentals, although the pandemic will remain a major factor.
Forex and the dollar
After reaching the 103 level in March, the US dollar index fell towards the 90 level. On the way down, the US dollar index made only one serious attempt to rebound in September. The pressure on the US dollar is strong and the market consensus is that the dollar will continue to fall. While this year’s downward movement may seem significant, the US dollar index may have more room to fall.
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Returning to the topic, in 2008 the US dollar index reached a low of 71 before bouncing back to 88. In 2011 the US dollar index tested a low of 73.Simply put, the current levels cannot be seen as a low for the US currency, so it could easily gain additional downward momentum if the global economy improves and investors increase their purchases of riskier currencies. The main risk to the bearish thesis is that shorting the dollar could become a very crowded trade.
The Australian dollar ended 2023 on a strong note. The main reason for this strength is the recent strength in the commodities segment, particularly in the iron ore market. The Reserve Bank of Australia’s dovish policy had little impact on AUD/USD as other central banks were also dovish. The consensus is:
- interest rates in the developed world will remain at their lowest levels;
- The Reserve Bank of Australia may be able to exert more pressure;
- bond yields will be affected without hurting the Australian dollar.
Australia’s relationship with its main trading partner, China, has deteriorated this year, but the countries’ interdependence is strong enough that their relationship has not seriously deteriorated. I do not expect major risks on this front. At present, the outlook for the Australian dollar looks optimistic, but its future trajectory will depend on continued rallies in commodities.
The EU and the UK have just managed to negotiate a Brexit trade deal, so the main risk to GBP/USD has not been realised. GBP/USD has been rising in recent months as investors bet on a successful outcome to the Brexit negotiations (and those bets have paid off), but now GBP/USD traders will need to find additional reasons to be upbeat on the pound.
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The topic of the British pound still needs a brief follow-up. The fundamental situation looks tough for the UK economy in the first half of 2024, which could put some pressure on GBP/USD, which needs additional upside catalysts once the Brexit negotiations are over. While the pound may have a little more room to run, GBP/USD bulls are likely to need help due to the general weakness in the US dollar.
Like other major central banks, the Bank of Canada will be forced to provide material support to the economy until inflation shows signs of life. Canada is also suffering from a second wave of the virus, although the situation stabilised in December. It remains to be seen whether this second wave will put additional pressure on the Canadian economy.
Oil price dynamics will remain an important catalyst for USD/CAD in 2024. If WTI oil manages to stabilise above the $50 level and gains more momentum, commodity-related currencies such as the Canadian dollar will receive an additional boost. At this point, the outlook for the Canadian dollar looks favourable. The main risk to Canadian dollar bulls is the sudden overall strength of the US dollar.
Towards the end of this year, the European currency has shown material strength. In recent years, the EUR/USD exchange rate has been under pressure from the European Central Bank’s dovish policy and disappointing growth in the Eurozone. However, the pandemic provided significant support for the euro as investors turned their attention to the problems of the US dollar. The main question for EUR/USD in 2024 is whether it can stabilise above the 2018 peaks at 1.2500.
While the ECB may be disappointed with the recent rise in the euro, which will put more pressure on economic growth, there is little it can do to stop the euro rising. The interest rate is already at rock bottom, the asset purchase programme is in operation and the ECB is reminding us that it has not run out of options to support the economy, there are limits to any central bank’s power.
Traders know this, so EUR/USD bulls are likely to try to test new maxima at the very beginning of 2024. If this early test shows that demand for the euro remains high, EUR/USD will have a good chance of developing a strong uptrend against the US dollar next year.
- this year has been a very interesting one for traders in the foreign exchange market;
- next year is likely to bring more volatility;
- market attention will focus on the fate of the US dollar;
- the global economy will be recovering from the blow dealt by the pandemic.
Commodity-linked currencies such as the Australian dollar and Canadian dollar may enjoy more support if demand for commodities continues to grow in line with the economy. It will be very interesting to see if the British pound can continue its rise after the UK successfully negotiated a trade deal with the EU.
For the euro, it could be another year of strength against the dollar despite the current problems in the European economy.