Global FX Monthly Outlook - 18 December 2023

More evidence of a slowdown in the US and dovish Fedspeak to boost EUR and GBP

EUR (1.090)

  • Both the European Central Bank (ECB) and the Fed decided to maintain their status quo in December. However, the Fed's shift towards a dovish stance triggered a significant downturn in both the USD index (DXY) and the 10-year US Treasury yield, thereby bolstering the EUR. However, the EUR's gains were capped by the ECB's subtle lean towards dovishness, coupled with diminishing inflationary pressures and lacklustre economic indicators across the eurozone.
  • Elevated borrowing costs and the depletion of consumer savings are expected to impact the US economy soon, potentially prompting the Fed to implement more rate cuts than indicated for 2024. Consequently, the DXY is anticipated to trend lower as investors continue to unwind their long USD positions, driving the EUR to conclude 2023 at around 1.10/USD. Nevertheless, EUR remain under pressure due to the looming possibility of the bloc's economy slipping into a recession in 2024.