Rates expectations shape global currencies but to stay higher in 2024 

PHILLIP ISAKPA  IN LONDON, UK

Divergence in rate expectations across major economies of the world is shaping the behaviour and outlook of major global currencies, but analysts continue to maintain that higher-for-longer interest rates will play out for the remainder of the year.

Central banks such as the Bank of England (BoE), the US Federal Reserve (Fed), the European Central Bank (ECB), and Bank of Japan (BoJ) are facing diverging rate expectations which analysts say “are shaping the trajectories of the pound, euro, US dollar and yen for the rest of 2024.”

Analysts say the lack of definitive position on the likely outcomes of these central banks decisions has led to the reality of a steady Sterling, a strong dollar, a weak euro, and a stable yen.

An advisory from deVere Group in London seen by Business a.m. said given this scenario “investors should consider several strategies to optimise their portfolios.”

But the analysts say a global policy base case of ‘Higher-for-Longer’ rates lasting for the rest of the year will form a major strategy for central banks. 

“We believe that the base case for central banks’ main strategy for the rest of 2024 will be to stick with ‘higher-for-longer’ rates, unless the global economy experiences a significant downturn,” the advisory by deVere Group stated.

According to the analysts at deVere Group, one of the world’s largest independent financial advisory and asset management organisations, the stance by the central banks is driven by the need to curb sticky inflationary pressures, which have made rate cuts a harder decision for the foreseeable future.

The warning offered in these advisories issued to investors and portfolio managers around the world comes on the back of falling global equities and bonds in Asia tumble amid overnight surging US Treasury yields surged, which were not helped by hawkish comments by a Federal Reserve official, dampening risk sentiment. 

Neel Kashkari, president of the Minneapolis Fed in the US had indicated that policymakers have not fully dismissed the possibility of further interest rate increases, despite the current restrictive policy stance.

But the deVere Group advisory noted that major global currencies are being shaped by the differing monetary policies.

Nigel Green, the lead analyst and chief executive, said with regard to the pound sterling, that it has shown resilience against the euro primarily due to differing monetary policy trajectories between the BoE and the ECB.

“The BoE is anticipated to maintain its current interest rate levels throughout most of the year, with the first potential rate cut not expected until the fourth quarter,” he noted. 

He explained that this conservative approach is supported by the UK’s economic conditions, where inflation remains a concern but is manageable under the current policy settings.

“The pound’s performance is expected to remain stable, benefiting from the UK’s relative economic stability and the anticipation that the BoE will keep rates unchanged longer than the ECB. 

“This stability against the euro is likely to persist, with the pound strengthening further if the ECB proceeds with rate cuts, as expected. 

“However, against the dollar, the pound might experience some volatility. The Fed’s policy stance, combined with global economic uncertainties, could impact the pound’s performance against the US dollar, although it is likely to hold firm if the UK’s economic fundamentals remain sound,” Green said.

The deVere advisory also offered specific commentaries on the other major currencies as follows:

Euro

“The euro has been trading near its weakest levels against the pound in two years, driven by expectations that the ECB will begin cutting rates in June. 

“Traders have almost entirely priced in the ECB’s rate cuts, reflecting a broad consensus that the eurozone requires more accommodative monetary policies.

“Despite its weaker performance against the pound, the euro has managed to fare better against the US dollar. 

“This relative strength is somewhat surprising given the fading expectations for a Fed rate cut. 

“However, if economic conditions worsen or global uncertainties increase, the euro might struggle to gain significant ground, especially against the pound and the dollar.

US Dollar 

“The dollar has shown considerable strength, buoyed by the recent shift in expectations regarding the Fed’s monetary policy. 

“Initially, there were strong expectations for a rate cut by the Fed, driven by signs of slowing economic growth and geopolitical tensions. 

“But these expectations have recently faded as economic data has shown resilience, suggesting that the Fed might maintain its current rate levels for a longer period.

“The dollar’s strength against the euro and the pound reflects this change in market sentiment. 

“For the remainder of the year, the dollar is expected to maintain its robust position, particularly if the US economy continues to show resilience. The currency’s performance will also be closely tied to the Fed’s communication and actions regarding monetary policy.”

The Yen

The deVere Group CEO affirms: “Japan’s perceived efforts to prop up the yen through substantial interventions have provided temporary relief, but the currency remains under significant pressure. 

“Tokyo is suspected to have spent around a combined 9 trillion yen ($57.11 billion) on April 29 and May 2 to arrest the yen’s sharp fall to a 34-year low of 160 to the dollar.”

“The strength of the US economy and the Fed’s rate decisions will play pivotal roles in determining the yen’s future trajectory,” deVere commented.

Green, however, said in the meantime, the BOJ’s continued accommodative stance will likely limit any significant appreciation of the yen, noting that market participants were closely watching last Friday’s meeting for the intervention data and broader economic indicators to gauge the potential for further interventions and the yen’s direction in the latter half of the year. 

“Considering that there was no international opposition, Japan can be expected to continue efforts to halt excessive yen drops through intervention,” he said.

He advised that given the current economic landscape and the predicted trajectories for the pound, dollar, euro, and yen, investors “should adopt a multi-faceted approach, perhaps combining diversification, hedging, and strategic allocations based on currency strength predictions to optimise their portfolios for both stability and growth.”

A sweeping look at the economic climates of the major decision points, according to deVere, show the differences shaping the behaviour of the central banks.

For instance, the advisory notes that in the US, the Federal Reserve is facing an economy that is not cooling off as much as desired. 

“Recent hawkish remarks from a Fed official have dampened market sentiment, reinforcing the belief of many analysts that rate cuts are off the table for this year. 

“The Fed’s cautious approach is rooted in the need to ensure that inflationary pressures are firmly under control before considering any reduction in interest rates. This means investors should prepare for a prolonged period of elevated rates, which will impact various asset classes differently,” Green notes in his comment.

The same point is made of the Bank of England (BoE), which is unlikely to cut interest rates in the near term, partly due to the upcoming general election, the advisory noted. 

“Political considerations often lead to a more conservative approach to monetary policy, to avoid any potential economic turbulence that could influence election outcomes. 

“Investors should note that the Bank’s likely decision to maintain higher rates can be expected to affect sectors sensitive to borrowing costs, such as real estate and consumer finance,” Green affirms.

Over in Europe, the European Central Bank (ECB) is in a slightly different position, it was acknowledged. 

“With inflation showing signs of slowing, the ECB does have room to ease monetary policy,” said the deVere Group advisory.

“However, key policymakers have indicated that any rate cuts will be gradual and measured. The ECB has signalled a potential rate cut for June 6, but beyond that, expectations have been tempered with the likelihood of just one more cut this year,” it further explained.

It drew attention also to Australia which, it said, presents a unique case where inflationary pressures have unexpectedly accelerated.

“The monthly Consumer Price Index (CPI) for April showed an uptick when a slowdown was anticipated, marking the second consecutive month of higher-than-expected inflation. This development complicates the Reserve Bank of Australia’s (RBA) policy decisions,” it commented.

Advising the global community of investors, especially equity and currency investors, deVere Group wrote of the need to adapt their portfolios accordingly, focusing on asset classes and sectors that can thrive in a higher-rate environment while managing risk effectively.

They are likely to allocate more towards shorter-duration bonds and high-yield corporate bonds to take advantage of higher yields without significant interest rate risk, it noted.

The advisory also noted with regards to equities: “In equities, they will focus on sectors that are less sensitive to interest rate fluctuations. Tech and healthcare stocks, known for their growth potential and relative independence from borrowing costs, are likely to offer stability and potential returns.

“Inflation-protected assets, such as commodities, will be attractive as they can help safeguard purchasing power and provide a buffer against unexpected inflationary spikes,” it added.

Nigel Green added thus: “As ever, diversification is the investors’ best tool to position themselves to mitigate risk and seize opportunities.”​