Even though there is scope for yield spreads to widen again in 2024, the bias for USD/JPY remains moderately lower…
By :David Scutt, Market Analyst
This is an excerpt from our full USD/JPY 2024 Outlook report, one of nine detailed reports about what to expect in the coming year. Click the banner at the bottom to download the full report.
Evaluating the outlook for USD/JPY in 2024 need not be a complex task, merely requiring you to take a view on how interest rate differential between the United States and Japan may evolve, along with the risk we may see disorderly financial markets, leading to a repatriation of capital to Japan from abroad as carry trades are unwound. While neither are easy to predict, making it any more complex risks creating noise that could easily distract from the signals you should be paying attention to.
This report will look at where the Federal Reserve and Bank of Japan (BOJ) sit in their respective interest rate cycles, what is expected next year, where financial market pricing may be wrong, along with how the macro environment may influence the trajectory for risk appetite and asset valuations.
Where’s the Fed at?
After the one of the most aggressive tightening episodes in modern times, the Fed has signaled recently that interest rates have likely peaked for this cycle. It’s now talking about cutting rates three times in 2024, taking the funds rate target from 5.25-5.5% to 4.5%-4.75%. Markets are even more aggressive with their expectations, pricing in six cuts over the course of the year, the first tipped to arrive in March.
A lot of preemptive easing is now priced in with growth expected to remain positive, allowing inflation to glide back towards the Fed’s 2% target. It’s the definition of a soft economic landing, but as we’re all aware, reality does not always oblige. With the US jobs market incredibly tight and financial conditions moving rapidly towards expansionary territory, rather than the debate being whether the US will see a hard or soft landing next year, the Fed’s unexpected early dovish pivot has arguably seen the risks shift to whether the US will see inflationary pressures accelerate again, resulting in a no landing scenario that may require tighter policy settings. While far from complete, the Atlanta Fed GDPNow model suggests momentum in the US economy is holding up in the fourth quarter after a strong performance in Q3.
Source: Atlanta Fed
There’ll be more on the no landing risk later.
What about the outlook for the BOJ? What are the key technical levels to watch on USD/JPY? See our full guide to explore these themes and more!
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