This article examines the fundamental factors that are likely to influence the trajectory of the U.S. dollar in the first quarter of 2024. For technical insights about price action dynamics, download the complete Q1 forecast!
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US Dollar – Market Recap
The U.S. dollar, as measured by the DXY index, started the fourth quarter on the front foot, briefly reaching its strongest position in almost a year. These gains were underpinned by the steady and consistent rise in U.S. Treasury yields, catalyzed by bets that the Federal Reserve would keep a restrictive stance for an extended period to restore price stability in the economy.
However, the greenback was unable to maintain its upward momentum for long. Shortly after setting a new 2023 high in early October, DXY shifted lower, undercut by the sharp downward correction in real and nominal yields following benign inflation readings.
With inflationary forces downshifting, markets began to price in aggressive rate cuts over the next few years in an attempt to front-run the FOMC next easing cycle. The U.S. central bank initially resisted the pressure to pivot, but relented at its December meeting, when it indicated that “talk” of cutting borrowing costs had already begun.
The Fed’s pivot accelerated the pullback in yields, sending the 2-year note below 4.40 %, a significant retracement from the cycle high of 5.25%. Simultaneously, the 10-year note plunged beneath the 4.0% threshold, when weeks earlier it was threatening to breach the psychological 5.0% level. In this context, the U.S. dollar index plummeted, hitting its weakest point since August.
The chart below shows how U.S. Treasury yields have performed in the fourth quarter.
US Treasury Yields Q4 Performance
Source: TradingView, Prepared by Diego Colman
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US Dollar Fundamental Outlook
The Fed’s unexpected dovish pivot is a clear signal that officials want to shift policy in time to engineer a soft landing; in other words, they are prioritizing growth over inflation. This bias won’t change overnight, but will likely consolidate further in the near term, so the path of least resistance remains lower for both bond yields and the U.S. dollar, at least for the first couple of months of 2024.
Navigational winds, however, could shift in favor of the greenback by the end of the first quarter, when additional data will become available for a more complete assessment of the macroeconomic picture.
The significant relaxation of financial conditions observed in November and December, which ignited a powerful surge in stocks, is likely to amplify the wealth effect heading into the new year, helping sustain sturdy household consumption—the key driver of GDP. In this context, the prospect of an economic upswing in the medium term should not be completely ruled out.
Any reacceleration in growth should boost employment gains and reinforce labor market tightness, putting upward pressure on wages. In this environment, inflation could settle well above the 2.0% target while staying skewed to the upside, preventing the Federal Reserve from pursuing a forceful easing campaign.
Although there is a heightened sense of optimism regarding the U.S. inflation outlook following encouraging CPI and Core PCE reports in the latter part of 2023, it is premature to declare victory. Any pause in progress or an upward reversal of the underlying trend in consumer prices next year could be cataclysmic for sentiment, prompting a hawkish repricing of interest rate expectations.
The chart outlines market expectations for monetary policy easing in 2024.
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2024 Fed Funds Futures Implied Yields by Monthly Contracts
Source: TradingView, Chart Created by Diego Colman
Winds May Shift in Favor of US Dollar Late in Q1
As the transition from Q1 to Q2 approaches, traders may finally grapple with the realization that the Fed won’t have the flexibility to cut rates as aggressively as once discounted. Adjusting to a new reality and shifting market assumptions, U.S. yields could stage a moderate comeback, fostering optimal conditions for the U.S. dollar to rebound more sustainably against its major peers.
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From Weak to Wow: A Story of Two Halves with a Strong Finish
We all have goals and dreams that we want to achieve in life. Some may be easy to attain, while others may require a lot of hard work, dedication, and perseverance. The journey to success is not always smooth, and along the way, we may face obstacles that can make us feel weak and discouraged. However, it is how we deal with these challenges that determine our end result. This is the story of two individuals who faced different struggles and challenges in their lives but managed to turn their weaknesses into strengths and end with a bang.
Katie’s Struggle with Self-Doubt and Anxiety
Katie had always dreamt of becoming a lawyer. Ever since she was a little girl, she would spend hours reading books on law and justice. As she grew older, she excelled in her academics and was top of her class in high school. She got accepted into the best law school in the country and was on her way to achieving her dream.
However, as she began her studies, she started to feel overwhelmed. The workload was intense, and the competition was fierce. Katie’s self-doubt and anxiety began to take over, and she constantly questioned whether she was good enough to be a lawyer. She started to doubt her abilities, and her grades started to slip. She felt weak and defeated, and the thought of dropping out crossed her mind multiple times.
John’s Struggle with Physical Limitations
John, on the other hand, had always been an athlete and had hopes of becoming a professional basketball player. However, at the age of 16, he suffered a career-ending injury that left him with a permanent physical limitation. John’s dreams were shattered, and he fell into a deep state of depression. He felt like he had lost his identity and couldn’t imagine a life without basketball. He was weak, both physically and mentally, and he couldn’t see a way out of his situation.
From Weakness to Strength
Both Katie and John were at their lowest points and felt like they had hit rock bottom. However, they didn’t let their struggles define them. They decided to take control of their lives and turn their weaknesses into strengths. Here’s how they did it:
1. Seek Support and Guidance
Katie reached out to her professors and peers for support and guidance. She confided in them about her struggles and was pleasantly surprised by the amount of understanding and encouragement she received. They helped her to realize that her self-doubt and anxiety were a normal part of the learning process and that she was not alone in her struggles. With their guidance, she was able to develop a plan to improve her grades and overcome her doubts.
Similarly, John sought support from a therapist and mentor. He talked about his fears and struggles and learned coping mechanisms to deal with his depression. His mentor helped him to see that his injury didn’t define him and that there were other ways for him to stay involved in the sport he loved. With their support, John regained his confidence and found a new sense of purpose.
2. Practice Self-Care
Both Katie and John realized the importance of taking care of themselves during their tough times. They made sure to get enough rest, eat well, and exercise regularly. These small acts of self-care improved their overall well-being and helped them to feel stronger and more resilient.
3. Embrace Failure
Failure is a natural part of life, and both Katie and John learned to embrace it. Instead of letting it get them down, they used their failures as learning opportunities. They reflected on their mistakes and found ways to improve and grow from them. This mindset shift helped them to persevere and eventually achieve success.
The Strong Finish
With their determination and perseverance, Katie and John managed to overcome their struggles and finish their respective journeys with a strong finish.
Katie graduated at the top of her class and landed a job at a prestigious law firm. She proved to herself and others that she was more than capable of being a successful lawyer.
John, despite his physical limitations, didn’t let his dreams die. He started coaching a youth basketball team and became an influential mentor to young athletes. His passion for the sport was reignited, and he found a new way to be involved and make a positive impact.
So, What Makes a Strong Finish?
The story of Katie and John teaches us that it is not about how we start, but how we finish. A strong finish is not just about achieving a goal or reaching a destination, but it’s about the journey and the lessons we learn along the way.
A strong finish is about:
1. Perseverance – never giving up, even when faced with challenges and setbacks.
2. Resilience – bouncing back stronger after facing adversity.
3. Growth – learning from failures and using them to improve and grow.
4. Belief in oneself – having confidence in our abilities, even when others doubt us.
5. Support – having a strong support system to lean on during tough times.
Practical Tips to Help You Achieve a Strong Finish
1. Set realistic goals and break them down into smaller achievable tasks.
2. Celebrate your progress and achievements, no matter how small.
3. Surround yourself with positive and supportive people.
4. Take care of your physical and mental well-being.
5. Remind yourself of your strengths and skills when facing self-doubt or setbacks.
Katie and John’s journey reminds us that even when we feel weak and defeated, it is possible to turn things around and finish strong. Their stories teach us the importance of perseverance, resilience, and self-belief. With the right mindset, support, and self-care, we can overcome our weaknesses and achieve our goals. So, let’s turn our weaknesses into strengths and finish strong.