As we wind down to the close of 2023, the Federal Reserve (Fed), European Central Bank (ECB) and the Bank of England (BOE) announced their rate policy decisions last week. As expected, all three have kept their respective benchmark rates unchanged. The central banks and market participants will now shift their attention from inflation pressures, pivoting to the timing and magnitude of interest rate cuts in 2024, as these global economies are in various stages of a slowdown.

For this article, I have chosen to focus on the Federal Reserve (Fed) and the Bank of Japan (BOJ). With recent US November Unemployment figures, we saw an unexpected strengthening of employment and wages. Non-farm payrolls increased 199,000 last month, compared to 150,000, in the month of October. The unemployment rate fell to 3.7% from 3.9% and monthly wage growth rose more than expected. Additionally, last Tuesday, US CPI figures were released. November’s consumer price index ticked up +0.1%, from October. Core CPI also moved higher on a monthly basis. Overall inflation is still declining, as 6-month annualized core inflation is now below 3% for the first time since the beginning of 2021.

At Wednesday’s FOMC announcement, Fed Chairman Powell and the committee outlined forecasts for a series of rate cuts in 2024. There were additional comments stating “inflation has eased over the past year but remains elevated” and “economic growth has slowed from the third quarter’s strong pace”. (Source: Bloomberg). These statements clearly are being interpreted by the investment community, as validation that Fed’s rate hike policy is complete and a soft landing is imminent. We’ve seen this reflected with rallies in both the US equity and bond markets. The median average for the aggregate amount of rate cuts in 2024 is now expected to be 75 basis points, or 3-monthly 25 basis points cuts. The timing of them is the question, which certainly will be data dependent.

Regarding the BOJ, the last month has shown increased volatility in Japanese Yen (JPY), with an overall decline in USDJPY based on expected rate cuts in the US in 2024. With the continued focus on the fate of the BOJ’s negative rate policy, there have been recent statements that have seen JPY appreciate against the USD and subsequently give back some of those gains. Last week, BOJ Governor Ueda hinted that further policy tightening could be a possibility, suggesting an end to their negative rate policy. We witnessed USDJPY dip below 142.00 only to watch a reversal occur over the following days. By this Monday, we saw USDJPY recover to a high around 146.50, after BOJ officials stated they see little need to rush into scrapping their negative interest rate policy, as they have not seen enough evidence of wage growth, supporting inflation (Bloomberg). After the FOMC announcement, USDJPY trended lower again, and at Wednesday’s NY close was trading at of 143.00. Thursday morning (11:00 AM EST, Dec 14th) USDJPY continued its decline and was trading in the range of 141.60-142.00.  The upcoming BOJ rate decision is set for tomorrow (Tuesday, Dec 19th). With the recent varying statements, the markets will be paying close attention to the language from their announcement to shed some light on the BOJ’s future policy strategy.

The graph below is a look at USDJPY over the past month, using market data points from TraditionData. It supports and illustrates the most recent economic announcements and quotes mentioned above. We’re approaching the end of an historic year in global interest policy. The focus now will shift to project when the various global economies will begin their anticipated rate cut policies, in 2024.

Get out the popcorn and be ready to watch next year’s movie unfold! FX Volatility will be increasing!

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