Euro-Dollar Falling Towards 1.02 in 2024 Says HSBC

Forex

Economic

Summary:

HSBC bucks the consensus, forecasting U.S. Dollar strength in 2024 with the Euro to Dollar exchange rate ending closer to parity. Contrary to market optimism, HSBC cites sluggish global growth, elevated geopolitical risks, and potential constraints on central bank policies. The bank believes sustained 'risk on and USD down' conditions are unlikely, projecting a Euro-Dollar rate of 1.06 by Q1 2024 and 1.02 by year-end.

It's a counter-consensus call for U.S. Dollar strength in 2024 from one of the world's banking giants, resulting in the Euro to Dollar exchange rate ending the year closer to parity than 1.10.

HSBC's projections show Euro-Dollar will trend lower as the Federal Reserve and other central banks may not be able to loosen monetary policy as much as markets are thinking.

As a result, HSBC warns there has been a lot of optimism expressed by markets already, and the hurdles for this to be upheld are even higher now.

Stock markets rose, and the Dollar fell in the wake of a perceived 'pivot' in policy at the Federal Reserve at its December update, where policymakers condoned market expectations for several interest rate cuts to fall in 2024.

The 'pivot' led Goldman Sachs to ramp up the number of bets it expects in 2024 from one to five, resulting in a downgrade to dollar forecasts by the bank's FX strategy team.

But the Fed's latest guidance has not shaken expectations at HSBC who are looking in the opposite direction.

"We retain our expectation for a stronger USD during 2024, in contrast to the consensus," says Daragh Maher, Head of Research for the Americas at HSBC.

Euro-Dollar Falling Towards 1.02 in 2024 Says HSBC_1

Above: "US growth surprises still holding up strong while the RoW has not improved" - HSBC.

The USD has been pressured since early November, which HSBC says is a result of U.S. inflation slowing and the Fed's pivot supporting risk appetite.

"However, we do not expect this to continue next year. There has been a lot of optimism expressed by markets already and the hurdles for this to be upheld are even higher now. Global growth is sluggish. The Fed and other central banks may not be able to loosen monetary policy as much as markets are thinking. Geopolitical risks are elevated," says Maher.

This combination leads HSBC's analysts to believe markets will not shift to a sustained environment of a 'risk on and USD down' theme, which would be consistent with USD weakness.

Furthermore, U.S. exceptionalism may not be as potent as it was for the USD, but to believe it will disappear is misguided, warns Maher (see above chart).

"A number of scenarios, including a potential US soft landing, still point to a strong USD, but only a global soft landing delivers a clear dollar bear case," he adds.

HSBC forecasts Euro-Dollar at 1.06 by the end of the first quarter of 2024, below the current level of spot at 1.0950, 1.04 by mid-2024, 1.02 by the end of the third quarter and 1.02 by year-end.

Source: PoundSterlingLive

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Damon

Economic

Consumers around the world are expected to be hit by the rising costs of Red Sea freight journeys as the threat of attacks by Yemeni rebels' forces shippers to divert their vessels, industry experts have said.

The situation has also gone beyond the acceptable risk of doing business and has escalated amid concerns about the security and welfare of seafarers.

This has prompted many shipping companies to suspend journeys through the key waterway, with the automotive and consumer goods sectors expected to be among the hardest hit.

Albert Jan Swart, a sector economist for transport and logistics at ABN Amro Bank, told The National that the situation was very serious due to the security risk, in particular to seafarers.

"I would expect higher sea freight rates as avoiding the Red Sea will lead to higher costs due to longer travel time," he said.

"Sailing around Africa will also lead to increased demand for vessel capacity. This will lead to higher rates and, possibly, a better margin for shipping companies as well.

"Financial markets also expect this. Maersk stock rose almost 8 per cent last Friday after reports of an attack on a Maersk vessel."

AP Moeller Maersk and Hapag-Lloyd suspended their Red Sea operations on Friday after their vessels became the targets of Houthi missiles.

They were joined by other major shipping companies, including CMA GGM and the Mediterranean Shipping Company.

The four companies collectively control about half of the global container shipping market.

Germany's Hapag-Lloyd, which originally said it was halting Red Sea journeys until Monday, said it would avoid the Red Sea and Suez Canal for now and, instead, reroute its vessels through the Cape of Good Hope as the risks remained "unacceptable".

Taiwan's Evergreen said on Monday that it had temporarily stopped accepting Israeli cargo. It instructed its vessels to avoid passing through the Red Sea until further notice and directed them to go around the Cape of Good Hope.

British oil company BP also stopped all its operations through the Red Sea, which it called a "precautionary pause under ongoing review" due to the "deteriorating security situation".

Analysis of more than 300 industrial categories and 6,000 products indicated that 14.8 per cent of all Europe, Mena imports were shipped from Asia and the Gulf by sea, according to S&P Global Market Intelligence.

That included 21.5 per cent of refined oil and 13.1 per cent of crude oil. Among industrial material imports, 24 per cent of organic chemicals and 22.3 per cent of flat-rolled steel destined for Europe and the Mena region were shipped from Asia and the Gulf.

"Just 8.6 per cent of total Asia and Gulf imports came from Europe and Mena by sea, though the automotive industry may face an outsize impact with 41.3 per cent of vehicles and 20.8 per cent of parts shipping on that route," said Chris Rogers, head of supply chain research in global intelligence and analytics at S&P Global Market Intelligence.

The transport of goods with a short shelf life will be difficult on the longer alternative routes that vessels must now take and consumers will bear the brunt of the impact from the current disruptions.

"Shipments of perishable goods including … milk products may not be able to endure the longer routes," Mr. Rogers from S&P Global Market Intelligence said.

"Consumer goods will face the largest impact, although current disruptions are occurring during the off-peak shipping season."

Mr. Rogers highlighted the difference between a short-term shock and a long-term realignment.

"In the short term, ports will need to deal with a dearth of imports followed by a surge as the 'global fleet' bunches up as a result of the pauses and onward sailing," he said.

"Consumer goods will face the largest impact, though current disruptions are occurring during the off-peak shipping season."

Christian Roeloffs, co-founder and chief executive of leasing company Container xChange, said shipping lines had been instructing their vessels to use the Cape of Good Hope, "adding quite a significant delay and time to their East to West trade journeys".

"An additional 40 per cent longer route, causing heavy upward pressure in the operating costs, is expected to persist as the shipping time extends anywhere between one to four weeks."

Alternative routes are compromised either practically or economically, according to S&P Global Market Intelligence.

"Transits via the Cape of Good Hope add at least 10 days and over 15 per cent to shipping costs. Land-based shipments by rail require crossing Russia while trucking from the Gulf to Israel may only offset around 3 per cent of shipping," Mr. Rogers said.

The Houthi attacks come at a time when the world's other major waterway – the Panama Canal – is being severely restricted by drought.

Traffic via the Panama Canal is already limited and its restricted role as an alternative route is forcing all major shipping lines to opt for the Cape of Good Hope route or use transloading strategies such as transporting goods through rail between countries.

The crisis would lead to rising costs for the sector and consumers, as well as potential delays during the busy Christmas season, said Zarir Irani, managing director of Dubai-based shipping surveyor Constellation Marine Services.

"You might not get that big Christmas gift that you ordered online on time, but it will definitely reach [you]," he said in a Dubai Eye interview on Tuesday.

Mr. Irani said companies in the sector would bear the financial brunt.

"Insurance costs have already doubled, and it's just going to be more costly to transit these waters," he said.

"The rising attacks would force shipping companies to consider how best to navigate the situation amid rising tensions. The immediate short-term supply chain disruption is what is the worry."

Commercial vessels may even consider "turning back", he said.

Swissquote Bank senior analyst Ipek Ozkardeskaya agreed.

"Considering that around 12 per cent of global trade goes through the Suez Canal, and the deviation around Africa adds between six to 14 days to shipments, the Red Sea disruptions delay the shipment of goods but also increase the price of shipping the goods."

The share prices of big shipping company stocks have increased as they stand to increase their prices.

Crude oil and natural gas prices came under renewed positive pressure as energy companies began to announce that they would avoid transiting through the Red Sea.

While the Red Sea has yet to close to shipping, insurance rates have risen and more ship operators may choose to avoid the route.

However, the impact of the crisis on global supply chains "should be relatively minor", compared with the Ever-Given incident, Mr. Swart said.

The Ever Given ran aground in March 2021 and blocked traffic through the Suez Canal for six days, severely disrupting the flow of goods.

"Christmas supplies have already arrived. Wholesalers, retailers and manufacturing firms are still unwinding excess inventories at the moment, so I do not expect severe shortages or extremely high freight rates like during the pandemic," he said.

The Houthis have stepped up their attacks despite warnings from the US and the formation of Operation Prosperity Guardian, a multinational security initiative involving 10 countries including the US, the UK, Bahrain and Seychelles, aimed at de-escalating the situation.

"Now the world powers are also in the Red Sea and you'll see more and more engagement to deter these attacks and hopefully things will go back to normal," said Sultan bin Sulayem, group chairman and chief executive of Dubai-based global ports operator DP World, on Dubai Eye.

Source: The National News

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Warren Takunda

Cryptocurrency

Michael Saylor, the co-founder and Executive Chairman of business intelligence company MicroStrategy Inc, on Monday said "there’s a lot of uncertainty around the rest of the crypto ecosystem, but the one thing we can count on is Bitcoin BTC/USD+5.19% going forward in the year 2024."

What Happened: During an interview with CNBC on Monday, Saylor said, "a strategy built around Bitcoin is generally a pretty safe one for institutions.”

Michael Saylor Says If Bitcoin 'Not Going to Zero, It's Going to a Million' — Believes Global Inflation Will Be Driver of BTC Adoption_1

MicroStrategy CEO also discussed the new rules announced by the Financial Accounting Standards Board (FASB) that require companies to account for cryptocurrencies such as Bitcoin at fair value.He welcomes this, as he believes it will bring more transparency and clarity to companies holding Bitcoin, and sees it as an opportunity for publicly traded companies to invest in Bitcoin as a legitimate Treasury reserve asset.

“Bitcoin represents a digital transformation of capital, 99.9% of the capital in the world is tied up in real estate and stocks and precious metals and bonds. And so we’re point 1% transformed. People, as they get educated on digital assets, are realizing that they ought to be allocating more and more of their capital to this digital asset,” he said.

Why It Matters: When asked about the recent rally in Bitcoin prices, up 56% since early October, Saylor said “If Bitcoin’s not going to zero, it’s going to a million."

On the impact of the upcoming Bitcoin spot ETF news on the rally, Saylor added, “This ETF news is good news. Loosening monetary policy is good news. Inflation anywhere in the world drives Bitcoin adoption. And of course, the halving is going to cut the available supply of Bitcoins for sale in half from the miners. And so we’ve got a confluence of very bullish milestones over the next six months, and I think smart money is investing into that ahead of it.”

MicroStrategy began its Bitcoin investment journey in August 2020. As of November 30, MicroStrategy owned 174,530 Bitcoins, acquired for approximately $5.28 billion at an average cost of $30,252 per Bitcoin.

Price Action: At the time of writing, BTC was trading at $42,926 up 4.60% in the last 24 hours, according to Benzinga Pro.

Source: Benzinga

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Warren Takunda

Forex

Economic

Recent events have overtaken Goldman Sachs's base-case assumptions for 2024, and economists at the Wall Street bank have announced adjustments to their dollar forecasts before the new year begins.

Following recent downside surprises in U.S. inflation readings and last week’s Federal Reserve Open Market Committee meeting, economists at Goldman Sachs have made a "significant" change to their Fed call.

They now expect five interest rate cuts from the Federal Reserve next year, compared to just one made in the initial 2024 Outlook publication.

This has resulted in a widespread downgrade to Goldman Sachs's USD forecasts for the year ahead. "Our new forecasts incorporate more Dollar weakness than before," says Kamakshya Trivedi, an analyst at Goldman Sachs.

At the December FOMC, policymakers added a further 25 basis points of rate cuts to their assumptions for 2024, and Chair Jerome Powell said in the press conference that the Committee discussed the timing of interest rate cuts, seeing a need "to reduce restriction well before 2% inflation".

With the Fed now expected to cut rates on five occasions in 2024, the Dollar can weaken, but Goldman Sachs says it will not be a rout.

"While the Fed appears to be turning towards rate cuts as a policy preference, cuts priced and being delivered in some other jurisdictions—especially the Euro area and China—look like much more of a policy necessity. In other words, we think the Fed has already shown its dovish hand, but the ECB for example could (and probably will) shift further than it did," says Trivedi.

Both the European Central Bank and Bank of England said last week they were in no mood to consider interest rate cuts at this point. But Goldman Sachs says these, and other, central banks will ultimately embrace rate cuts, limiting USD weakness.

Currencies with more upside from current levels are pro-cyclical currencies that should benefit from the Fed loosening its grip on financial conditions.

These include KRW, ZAR, AUD, NZD and GBP.

"We expect relatively contained returns from current levels in the key challengers that still face a number of idiosyncratic domestic hurdles (EUR, CNY and JPY)," says Trivedi.

"Effectively, evolving expectations for the Fed make it a little more comfortable for the cyclical parts of FX to be 'living in a Dollar world,' but we are still 'waiting for a challenger' to be able to take the lead and fully erode the Dollar’s strength," he adds.

Goldman Sachs now forecast the Pound to Dollar exchange rate at 1.28 in three months, an upgrade from the previous forecast of 1.25. In six months, the pair is seen at 1.30, unchanged from the previous forecast and in 12 months, the target is raised to 1.35 from 1.30.

The Euro to Dollar exchange rate is forecasted at 1.08 in three months (1.04 previously), 1.10 in six (1.06), and 1.12 in twelve months (1.10).

The Dollar to Yen exchange rate is forecasted at 145 (155), 142 (155), and 140 (150) at the aforementioned time points.

For the Australian Dollar to U.S. Dollar conversion, the profile is 0.68 (0.62), 0.70 (0.64) and 0.72 (0.66) for 3,6 and twelve months ahead. For the New Zealand Dollar to U.S. Dollar forecast, the points are 0.63 (0.57), 0.65 (0.59) and 0.67 (0.61).

Source: PoundSterlingLive

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Chandan Gupta

Forex

At the end of its last monetary policy meeting, the Bank of Japan decided to leave negative interest rates and future outlook unchanged.There was speculation that the bank might start talking about changing its policy, but that did not materialize.The market reacted by selling Japanese yen.

The Reserve Bank of Australia has released the minutes of its last monetary policy meeting, which contained no surprises and had little impact on the Australian dollar.Member countries saw positive signs of progress in inflation and were determined to keep interest rates unchanged. Asian stock markets remain mixed, but major U.S.

Indexes continue to rise after closing Friday at their highest weekly levels in two years. The price of the Nasdaq 100 index is very close to its all-time high, and the benchmark S&P 500 index is very close to a new two-year high.

Crude oil continues to soar after hitting a two-week high and trading at six-month lows due to Houthi attacks on Red Sea shipping, forcing major shipping companies to refuse shipments &Transport of goods through the Red Sea. The United States has said it is organizing a military operation to fully reopen the Red Sea to navigation, potentially mitigating the surge.

In the foreign exchange market in Tokyo, the NZD/JPY currency pair is in the spotlight, with the New Zealand dollar being the strongest major currency and the Japanese Yen being the weakest.At the moment, there doesn't seem to be a valid long-term trend that this asset class can capitalize on. However, as the USD has weakened again over the past week, attention will be on the long side of EUR/USD if it reaches a daily close above the key resistance level at $1.1008.

Bitcoin appears to have support at the $40,907 level, but any upside from this level seems weak.

Cocoa futures closed higher yesterday and remains within a valid and very strong long-term uptrend.

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Forex

GBP/USD climbed to a new four-month high in the previous week, but it reversed lower again, falling beneath the 61.8% Fibonacci retracement level of the down leg from 1.3140 to 1.2035 at 1.2720.

The next major support level for traders to have in mind is the 20-day simple moving average (SMA) at 1.2615, with the technical oscillators confirming another bearish wave. The MACD oscillator is falling beneath its trigger line in the positive territory, while the RSI is flattening above the 50 level.

If price action remains above the 50.0% Fibonacci of 1.2590, there is scope to test the 61.8% Fibonacci of 1.2720. Clearing this key level would see additional gains towards the four-month peak of 1.2795. This is considered to be a strong resistance area which has been rejected a few times in the past. Rising above it could see prices re-test the 1.3000 round number, taken from the peak on July 27.

If 1.2590 support fails, then the focus would shift to the downside towards 1.2495, which overlaps with the 200-day SMA. If breached, that would increase downside pressure, and perhaps bring about a reversal until the 38.2% Fibonacci of 1.2460 and the 50-day SMA at 1.2400. From here, GBP/USD would be on the path towards the 23.6% Fibonacci of 1.2300 ahead of the short-term ascending trend line at 1.2200.

Overall, GBP/USD has been bullish since bottoming at 1.2035. However, near-term weakness is expected to remain as long as technical oscillators are still losing some steam.

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Warren Takunda

Economic

The British Pound will fall to levels last seen against the Euro during the crisis sparked by former Prime Minister Liz Truss when she introduced her controversial budget in September 2022.

This is according to analysis from Deutsche Bank, where a slowing UK economy is expected to prompt the Bank of England into a May interest rate cut, resulting in a decline in Pound Sterling's value.

Deutsche Bank analyst George Saravelos explains, "the timing and speed of the adjustment from hiking to cutting for individual central banks will be a dominant influence for each currency in 2024."

On this count, the Pound will be penalised by the Bank of England, which Deutsche Bank expects to cut Bank Rate in May, ahead of the U.S. Federal Reserve and European Central Bank, both of which are seen cutting in mid-year.

"Past monetary policy tightening is clearly starting to feed through the economy," says Saravelos. "House prices have started their correction, but likely have further to fall. This sharp slowing in housing activity is also yet to feed through to the labour market, which in any case is finally showing signs of cooling fairly quickly."

Deutsche Bank's base case is that the Bank of England will start cutting rates in May next year. It looks for both the Federal Reserve and ECB easing cycles to start mid-year.

Truss Crisis Levels Await Pound to Euro Rate in 2024, Says Deutsche Bank_1

Above: It is back to levels associated with recent crises for Pound-Euro says Deutsche Bank. (Purple lines show forecast levels at mid-year and year-end).

In addition, analysts say the UK’s external accounts remain in a poor place, with the broad basic balance turning negative again.

"For EURGBP meanwhile, we think a move north of 0.90 (which we assess to be fair value across DBeer and PPP models) is likely, and fair value in the cross will continue to drift higher as long as UK inflation remains stickier," says Saravelos.

The Euro to Pound exchange rate is forecast to rise to 0.90 by mid-year 2024, ahead of 0.92 by year-end.

This gives a Pound to Euro exchange rate of 1.11 and 1.0870.

The exchange rate was last this low when former Prime Minister Liz Truss announced an unfunded budget that caused financial markets to panic.

In fact, forays below 1.10 have only ever been associated with crises, including the coronavirus outbreak of 2020, post-2016 Brexit negotiation anxieties and the 2008 financial crisis.

So, it is crisis-era levels for a currency that is not expected to experience a crisis.

Yet, Deutsche Bank expects politics to be a benign factor over the coming months.

"We don’t see the next general election – due by January 2025 - as a major risk event for the pound. Current polls suggest the Labour party will win a majority, but for now there aren’t many large differences between the fiscal and Brexit stances across the major parties," says Saravelos.