BNP Paribas expects a prolonged bearish course for the USD, citing the dovish stance of the Federal Reserve and broader global economic patterns as key influencers.
The bank projects EUR/USD to climb to 1.15 and 1.18 by 2024 and 2025, respectively. It also forecasted USD/JPY to decline to 135 and 130 by the respective years.
After a 0.9 percent decline on Friday, the EUR/USD pair regained ground on Monday, supported by a bounce above the psychological barrier of 1.10.
Despite the dollar's mixed performance in subdued markets, the pair stabilized above the 20-day Simple Moving Average (SMA), edging up beyond 1.0900. As of writing, it remains flat at 1.0928.
A slight bullish bias may persist if the price stays above 1.0900 (38.2 percent retracement of the 1.0723 to 1.1009 upward movement), but surpassing 1.0950 is crucial to offset potential downside risks.
However, Forex Live suggests that the potential for further recovery appears limited. The recent weaker-than-anticipated German Ifo data and the increasing bearish momentum observed on the daily chart backed this sentiment. A long upper shadow on last week's candlestick and repeated failures to close above 1.10 signal a negative near-term outlook for the pair.
Elsewhere in the eurozone, the pound slipped by 0.31 percent against the dollar to $1.2641. The British currency found support due to expectations of higher interest rates compared to most other major economies next year.
Recent Yen volatility
Similar to the euro's movement, the yen declined on Monday but remained close to its recent highs. As of writing, the dollar stood at 143.38 yen, marking a 0.45 percent increase against the Japanese currency.
Recent volatility in the Japanese currency reflects market uncertainty regarding the Bank of Japan's potential phase-out of its negative interest rates, sparked initially by comments from Governor Kazuo Ueda. Investors now anticipate clarity on the bank's rate outlook from Tuesday's decision after the two-day BOJ meeting.
Markets' expectation of the BOJ's exit from its ultra-loose policy helped push the yen higher by 6 percent, following a multi-decade low near 152 against the dollar in November.
"This shift in sentiment will no doubt be welcomed by the Bank of Japan and to some extent helps them out concerning the weakness of the yen ahead of tomorrow's rate decision," CMC markets strategist Michael Hewson said.
Possibility of rate cuts
After the Federal Open Market Committee (FOMC) meeting last Wednesday, markets now price in around 150 basis points of rate cuts by the end of 2024. If economic data indicates a continued slowdown, there's a possibility that these expectations for rate cuts may increase further.
BNP Paribas' forecasts align with these expectations. In comparison, it projected fewer rate cuts from major central banks outside the U.S. This trend could result in a narrowing of interest rate differentials between the U.S. and other regions.
The Fed's projections indicate 75 basis points of rate cuts for the coming year, less than markets' expectations. According to the latest quarterly projections, Fed committee members anticipate reducing the key policy rate to 4.6 percent by the close of 2024, down from the current range of 5.25–5.5 percent.
Among the 19 committee members, 11 predicted a year-end 2024 policy rate of no more than 4.625 percent, suggesting a range between 4.5-4.7 percent. At the same time, Fed Chair Jerome Powell indicated the possibility of an extra rate hike, although it was unlikely.
Policymakers anticipate a year-end policy rate of 3.6 percent for 2025, revised down from the previous forecast of 3.9 percent in September. The projection remains unchanged for 2026, with an expected further cut to 2.9 percent.
However, New York Fed President John Williams' remarks post-meeting indicated it was still too early to discuss a possible rate cut by March. This statement implied that rate cuts might still be far away.