Macro Outlook 2024: Not so fast – dollar to decline but rout unlikely

The overwhelming consensus amongst sell-side analysts was that the macroeconomic environment would be much more constructive in 2024 as inflation conditions cooled and growth held up, enabling central banks to take policy back to neutral levels in a rapid manner. With the Fed expected to lead the DM easing cycle, most saw 2024 as the year in which the dollar structurally depreciated, with losses concentrated against low-yielding Asian currencies and pro-cyclical currencies. The more benign economic outlook was also seen generating lower levels of option volatility and a stronger year for equities. Towards the end of 2023, another round of soft DM inflation data and signs of continued labour market normalisation saw markets aggressively price this outlook, with money markets closing the year with 160bps of rate cuts from the Fed for the upcoming year. The drop in US rates subsequently weighed on the dollar, leaving it to close out the year 2% lower.

The aggressive shift in the market environment is inconsistent with the underlying macroeconomic reality, however, and has left cross-asset pricing in an unstable equilibrium in our view. We see this correcting in favour of renewed US dollar strength in the first quarter as market pricing of the Fed’s easing cycle is reigned in, and weak growth conditions in the eurozone and China sustains the US exceptionalism narrative. It is not until mid-Q2 that we think the macroeconomic picture will begin to improve. Coinciding with the start of the Fed’s easing cycle in May under our base case, this should support the structural dollar decline that many are anticipating to occur this year, with losses more varied than concentrated against high yielders. However, like 2023, we expect the overall level of dollar depreciation to remain moderate, with the DXY index falling by 3.8% as per our base case.

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Authors: 

Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

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