USD is the key to 2024H1
US, Japan, and the European Central Bank meetings
The US dollar index continued to decline in December 2023, dropping over 2% on top of the nearly 3% fall in November. $USD Index(USDindex.FOREX)$ $Invesco DB US Dollar Index Bullish Fund(UUP)$
The unexpected shift in the December Fed meeting was a significant factor in the dollar's weakness. Fed Chair Powell, in the press conference following the meeting, abandoned the previous "higher for longer" rhetoric and hinted that rate cuts could begin before inflation returns to 2%. These changes caused the market to reevaluate the timing and extent of Fed rate cuts.
In December, US bond yields further significantly declined, driving up risk assets. The dollar index even approached its low point from July 2022. In the first month of the new year, major central banks will hold their first policy meetings. T
he market will closely watch central banks' attitudes toward the shift in trading. The Fed's meeting will take place at the end of the month, and the market will observe whether it will deny speculation of a rate cut in March.
The focus of the ECB and BOJ meetings will be on whether they will communicate potential policy adjustments to the market. We expect the ECB to continue to refrain from discussing rate cuts against the backdrop of a rebound in year-on-year inflation, while the BOJ may begin normalizing communication. These changes may set the tone for the remaining time in the first quarter for foreign exchange trends. $Japanese Yen - main 2403(JPYmain)$ $iShares MSCI Japan ETF(EWJ)$
US and European inflation trends
With major central bank meetings concentrated in late January 2024, in the first half of January, we believe the market may adjust its pricing of central bank monetary policy based on economic data. $iShares TIPS Bond ETF(TIP)$
The unexpected sharp drop in US and European inflation in December 2023 was one of the key drivers for the shift in trading. After the new year, the rate of inflation decline may become a crucial determining factor for further progress in the shift in trading.
United States Inflation Rate
Considering factors such as base effects and a rebound in oil prices, we believe there is a possibility that the year-on-year inflation rates for the US and Europe in December 2023 may rebound to some extent.
Therefore, the downward momentum of the dollar and US bonds may change after the inflation data is released.
Economic situations in Europe and China
The decline in US bond yields and the US dollar index in the last two months of 2023 is reminiscent of the situation a year ago. However, there is an important difference between the end of 2023 and the end of 2022: economies outside the US did not show the same strong recovery momentum as a year ago.
Euro Area Inflation Rate
There is still a certain risk of stagnation in the European economy, and the market generally expects that the extent of rate cuts by the ECB in 2024 will be similar to that of the Fed. $Euro FX - main 2403(EURmain)$ $iShares MSCI Germany ETF(EWG)$
This may limit the upside potential of the euro.
In China, the manufacturing PMI declined in the fourth quarter of 2023, indicating that the economic recovery still awaits further implementation of fiscal measures.
Therefore, in the new year, we believe the downside potential for the dollar is to some extent.
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