The global economic landscape has undergone a dramatic transformation in recent years, with central banks worldwide aggressively raising interest rates to combat soaring inflation. However, as inflation rates recede and economic growth prospects weaken, a shift in global monetary policy is underway. Many central banks have now already begun to cut interest rates, signalling a pivot from the era of aggressive tightening.
This shift has profound implications for the foreign exchange (Forex) market. As interest rate differentials between countries change, currency values are fluctuating. These shifts present both opportunities and challenges for traders navigating the Forex market in the end of 2024 and beyond. Let’s delve deeper into what to expect then.
Post-Rate Hike Era: A New Paradigm for Forex Traders
As we move beyond the rate hike era, the dynamics of forex trading is shifting and traders need to understand central bank policies as well as their economic forecasts to select the most promising currency pairs to trade in mostly a falling interest rates environment.
Interest rate differentials—which represent the difference in rates between countries—are crucial drivers of currency movements. When rates rise in one country, its currency typically appreciates as traders seek higher returns, which in turn increase capital inflow into this currency. Conversely, rate cuts can lead to currency depreciation, as traders are moving away from these currencies to favour others with higher interest rates and stronger growth potential.
As central banks unwind their tightening policies, we may see a trend other than the one observed during the rate hike period. Currencies in countries with high rates may weaken, while those maintaining higher rates could strengthen. But as global rates converge or decline, forex traders using regulated fintechs will need to look beyond rate differentials and consider geopolitical risks and economic growth to select the right currency pairs for their strategies.
2024: The Year of Global Rate Cuts by Major Central Banks
Switzerland was the first major central bank to lower rates in March 2024, with another cut to 1% by September. The Bank of England followed in August, reducing rates to 5%. New Zealand’s Reserve Bank cut rates to 5.25% in August, while the Bank of Canada began easing in June from 5%, reducing rates by 25 basis points, and continued in July and September.
The European Central Bank (ECB), which hadn’t adjusted its interest rates since 2021, cut rates in June 2024, followed by more reductions in September and October. The U.S. Federal Reserve also joined the rate-cutting cycle in September, reducing short-term rates to 4.75%-5% after peaking at their highest since 2006. Meanwhile, the Reserve Bank of Australia has kept its rates steady at 4.35% since November 2023.
This global shift in monetary policy reflects not only the decline in inflation but also concerns about slowing growth. Central banks are also acting to support growth and any worries about the direction of their economic growth have a direct impact on forex markets, as traders reassess currency values based on growth prospects and what it might mean for monetary policy trajectories.
IMF Growth Outlook for 2024 and 2025
According to the latest growth report from the IMF, global GDP growth is expected to stay at 3.2% in 2024 but slow slightly to 3.1% in 2025.
Emerging markets like India and Brazil are showing strong growth potential, while China’s forecast remains at a below-trend 4.5%. The U.S. economy is also projected to drive global growth among developed nations, with the IMF upgrading its 2024 forecast to 2.8% and its 2025 forecast to 2.2%, fueled by strong consumer spending.
However, the IMF warns that risks remain, including geopolitical tensions, potential trade wars, and the lasting effects of previously tight monetary policies, all of which could influence the forex market at the end of 2024 and beyond.
Bottom Line
With central banks worldwide pivoting from aggressive interest rate hikes to accommodative policies, forex traders should keep an eye on economic growth, geopolitical risks, volatility, and emerging market trends for identifying potential forex trading opportunities.
As per the IMF’s growth forecasts, traders might want to keep an eye on exotic currencies like the Indian Rupee (INR) and the Brazilian Real (BRL), as these emerging markets are expected to exhibit stronger growth prospects, especially compared to some developed economies.
Additionally, the Bank of Japan’s decision to end negative interest rates in March 2024 and to keep rising rates signal a potential shift towards more hawkish monetary policies. This could support the Japanese Yen (JPY), which reached record lows against the USD in 2024.
