Q1 2024 Central Bank Outlook

_{Source: FOMC}

Europe

European Central Bank Outlook

The European Central Bank (ECB) pledges to ‘follow a data-dependent approach to determining the appropriate level and duration of restriction’ at its last meeting for 2023, but it seems as though the Governing Council is preparing to alter the course for monetary policy as the central bank ‘intends to reduce the PEPP (Pandemic Emergency Purchase Program) portfolio by €7.5 billion per month on average’ in the second half of 2024.

Until then, the ECB may carry out a wait-and-see approach in managing monetary policy as President Christine Lagarde and Co. insist that ‘our policy rates will be set at sufficiently restrictive levels for as long as necessary,’ and the Euro may outperform its US counterpart in 2024 should the Governing Council tame speculation for a looming rate-cut.

However, signs of a slowing economy may push the ECB to unwind the restrictive policy as ‘the risks to economic growth remain tilted to the downside,’ and the Euro may face headwinds should the Governing Council show a greater willingness to reduce Euro Area interest rates.

EUR/USD Weekly Chart

_{Source: TradingView}

A head-and-shoulders formation has taken shape ahead of 2024 as EUR/USD bounced back from a fresh yearly low (1.0448) in October.

The threat of a key reversal may likely persist as long as EUR/USD trades below the left- should, which comes in around 1.1070 (23.6% Fibonacci retracement to 1.1090 (38.2% Fibonacci extension). EUR/USD may give back the advance from the 2023 low (1.0448) if it struggles to hold above 1.0610 (38.2% Fibonacci retracement) but needs a break/close below the 1.0200 (23.6% Fibonacci retracement) handle to open up the November 2022 low (0.9905).

Nevertheless, a break/close above the 1.1070 (23.6% Fibonacci retracement to 1.1090 (38.2% Fibonacci extension) region would negate the head-and-shoulders formation, with a breach above the 2023 high (1.1495) opening up the 1.1430 (100% Fibonacci extension) to 1.1440 (61.8% Fibonacci extension) area.

Asia/Pacific

Bank of Japan Outlook

Meanwhile, the Bank of Japan (BoJ) continues to offer a dovish guidance as the central bank votes unanimously to carry Quantitative and Qualitative Easing (QQE) with Yield-Curve Control (YCC) into 2024.

The BoJ appears to be in no rush to alter the course for Japan after deciding to ‘conduct a broad-perspective review of monetary policy, with a planned time frame of around one to one and a half years’ at the April 2023 meeting, and Governor Kazuo Ueda and Co. may retain the current stance over the coming months as the central bank plans to ‘patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions.’

As a result, the BoJ’s easing-cycle may continue to drag on the Japanese Yen in 2024, but a deterioration in carry-trade interest may also sway foreign exchange markets as major central banks alter the outlook for monetary policy.

USD/JPY Weekly Chart

_{Source: TradingView}

USD/JPY approached the 50-Week SMA (green) after failing to test the 2022 high (151.95), and the exchange rate may face a further decline if it fails to respond to the positive slope in the moving average.

A break/close below the 139.60 (50% Fibonacci retracement) to 140.00 (23.6% Fibonacci retracement) region may push USD/JPY towards 136.70 (38.2% Fibonacci retracement), with the next area of interest coming in around 132.60 (38.2% Fibonacci retracement) to 133.90 (23.6% Fibonacci retracement).

Failure to defend the March low (129.65) opens up the 2023 low (127.23), but a move back above 146.70 (78.6% Fibonacci retracement) brings the 2022 high (151.95) back on the radar, with the next historical level coming in around the July 1990 high (152.25).

Written by David Song, Strategist

Follow David on X: @DavidJSong