News & analysis

Data out of the US at the beginning of November provided the perfect mix for traders to begin significantly adding to Fed easing bets in 2024, leading markets to front-run what was seen as the main trend to trade in 2024 after tighter financial conditions sparked pushback from Fed officials in October, putting an end to the short duration trend of Q3. While the Fed cautioned against extrapolating too much from the latest round of data and flagged the risk looser financial conditions pose in reflating the US economy – Chair Powell even specifically warned against “head fakes” in the data – this did little to dampen the level of participation in taking Treasury yields lower. In fact, the drop in 10-year yield over the past month was the third largest since the turn of the millennium, superseded only by the peak of the financial crisis and comparable only to September 2002 when deflation risk was prominent in the US and during the height of the 2011 eurozone bond crisis. However, unlike previous selloffs, the Goldilocks nature of the data meant that the decline in the 10-year yield last month didn’t spell trouble for risk assets. This led the broad dollar to shed 3% on the month, with losses largest against cyclical and rate-sensitive currencies.

While the dollar’s direction went against our forecasts last month, we think it remains too early to buy into the dollar’s decline. The slowdown in US growth in Q4 is likely to reverse at the start of next year as real wage growth supports consumption. Even if this isn’t the case, sustained softness in growth is likely to raise the risk of the US falling into recession, with any negative surprises in activity likely to spark bouts of USD appreciation on risk-off flows. Furthermore, the latest leg lower in the US dollar hasn’t coincided with improving macro conditions in major trading partners. So while we maintain our bearish view on the dollar from mid-2024 onwards, we continue to envisage a stronger dollar heading into 24Q2.

You can read our December 2023 FX Forecasts report here:




Simon Harvey, Head of FX Analysis

Nick Rees, FX Market Analyst

María Marcos, FX Market Analyst


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