FX Pulse: The big ease 2024 Q4

Summary & conclusions

The Fed has joined the easing party and we expect it to ease more aggressively than other central banks over the next 12 months. Meanwhile, we think BOJ tightening will make JPY the strongest among major currencies.

Recent developments

The Fed was late to the easing party, with more than 40 other central banks having already cut interest rates during 2024 before the Fed’s 19 September cut (according to CentralBankRates). Indeed, 42 central banks eased during 2024 Q4, with eight of them linked to our selection of the 10 most traded currencies (the BOJ and Australia’s RBA were the exceptions).

But the Fed started the easing cycle with a bang, making a first rate cut of 50 basis points (bps). This was surprising in both its magnitude and timing (the Fed traditionally avoids making policy changes so close to an election). The accompanying FOMC member forecasts suggest there is a lot more to come. Markets agree, judging by Federal Funds futures, which suggest the upper end of the Fed’s policy range will be around 3.00% by the end of 2025 (versus the current 5.00%).

To our surprise, the larger than expected Fed easing didn’t depress the dollar (see Figure 2). Fed Chair Powell seemed to convince markets that the bigger than expected cut was designed to keep the economy on track and not a sign of concern about growth. We are not so sure.  

The post-Fed easing resilience of the dollar may also be explained by the fact that other central banks eased sooner than the Fed. For example, the Swiss National Bank (SNB) recently cut for the third time in six months, bringing its policy rate down to 1.00% (though CHF has been supported by positive fundamentals), while the ECB has already eased twice (each time by 25 bps).

The Chinese authorities have also been active, with PBOC rate cuts in July followed by a string of actions by the central bank and other governing entities in late September. This has revitalised the Chinese equity market but has not impacted CNY (see Figure 2).  We expect these actions to support the Chinese housing market and economy, though how much is to be seen. 

Elsewhere, GBP has shown the most consistent momentum, aided by the BOE’s reticence to ease (the only cut so far was on 1 August 2024) and perhaps by the change in government. Likewise the reluctance of the RBA to ease has probably aided AUD, while BOJ tightening is no doubt behind the improved momentum in JPY. 

On the other hand, we believe that Fed easing and rich valuations explain the weakness of USD and HKD.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.