Credit Agricole examines historical FX market trends surrounding past Federal Reserve easing cycles and US recessions, offering a forecast template for the next 6-12 months. The analysis predicts a Fed easing cycle beginning in summer 2024, coinciding with a mild US recession from Q4 2024, and explores the implications for the USD.
Key Points:
Fed Easing and US Recession: The anticipated start of the Federal Reserve's easing cycle in summer 2024, coupled with a mild US recession commencing in Q4 2024, sets the stage for varied impacts on the USD.
Historical FX Performance Template: By analyzing FX returns during past Fed easing cycles and US recessions, Credit Agricole constructs a stylized template for forecasting FX market behavior in 2024.
Impact on the USD: The onset of the Fed's easing cycle is expected to negatively affect the USD, while the start of a US recession could have a positive impact, creating a complex dynamic for currency traders.
USD Rally in No Landing Scenarios: Historical instances where a Fed easing cycle did not lead to a landing (soft or hard) for the US economy saw a short-term rally in the USD, indicating potential resilience under certain conditions.
Key Risk: A significant risk to consider is the historical pattern where a Fed easing cycle, followed by a no landing scenario, resulted in strong positive momentum for the USD, challenging conventional expectations.
Conclusion:
Credit Agricole's analysis of 50 years of US economic history offers nuanced insights into the potential FX market dynamics over the next 6-12 months. While the expected Fed easing cycle and a mild US recession suggest mixed directions for the USD, historical precedents highlight the currency's resilience in no landing scenarios. Investors and traders are advised to prepare for complex interplays affecting the USD amid evolving economic conditions.
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