Article by: ETO Markets
In 2023, major central banks successfully controlled inflation, which turned out to be much lower than expected. Surprisingly, China's shift away from zero-Covid measures, initially seen as a risk to inflation, had the opposite effect. China's economic struggles didn't contribute to inflation but rather helped mitigate it.
The Federal Reserve (Fed) appears more cautious compared to European central banks. Despite significant drops in inflation in Europe and Britain, their weaker economies suggest a need for more relaxed monetary policies. In contrast, the US economy remains robust, as evidenced by a 5.4% increase in durable goods orders in November. The growing disparity in economic conditions between the US and Europe raises questions about the divergence in policy stances between the dovish Fed and the more hawkish European central banks.
In upcoming 2024, EUR/USD is likely to be influenced by central bank interest rate cuts. Traders believe both the US Federal Reserve and the European Central Bank will cut rates in the first half of the year. The key question for EUR/USD traders is which central bank will cut rates more relative to expectations. Expectations for both banks are similar, with around five or six anticipated rate cuts starting in March.
Basic economic analysis suggests higher odds of the ECB making more rate cuts than the Fed, increasing the likelihood of EUR/USD declining in 2024. Simply put, the US is expected to have stronger economic growth than the Eurozone, and both central banks aim to combat similar levels of inflation. The Eurozone faces a risk of recession due to lower growth projections for its largest economies—Germany, France, and Italy.
In November, Japan's job market stayed tight, creating challenges for employers gearing up for annual wage talks with unions. The job-to-applicants ratio dropped slightly to 1.28, surprising economists who expected it to stay at 1.30. This means there were 128 job openings for every 100 job seekers.
Japan's labor market continued to show a strong demand for workers. The unemployment rate held steady at 2.5%, and the number of workers increased by 560,000 compared to the previous year. Bank of Japan Governor Kazuo Ueda acknowledged the tightening labor conditions, anticipating it to drive wage growth and workplace efficiency. Particularly in the service sector, the shortage of workers is escalating, leading to the highest number of bankruptcies due to a lack of manpower since 2014. The USD/JPY saw some upward movement as traders responded to Japan's Unemployment Rate report...
