Ella 
In recent years, foreign exchange market investors have been frustrated by a lack of divergence in central bank policies. Although there are obvious cyclical differences in the policies of central banks, high inflation hinders the formation of major policy differences among central banks. However, as inflation approaches target, the impact of cyclical data on policy decisions could create a key difference between market volatility in 2024 and 2023. This is an important basis for our relatively pessimistic view on the euro.
The European Central Bank is expected to be one step ahead of the Fed in cutting interest rates for the first time.
However, markets appear to be discounting the prospect of a major policy divergence between the Fed and the European Central Bank. If anything, markets are still assuming to some extent that the inflationary backdrop will be more persistent, or that Europe will maintain its hawkish policy bias. But with the ECB back in panic mode, traders may soon wake up.
In November, USD/JPY fell from its recent high, mainly due to the yen’s active adjustment of interest rate differentials. The decline in long-term Japanese government bond (JGB) yields was only about half the corresponding decline in U.S. Treasury yields. However, the Japanese yen’s performance against the US dollar is the weakest among the G10 currencies, sharing this status with the Canadian dollar. Two key factors may have contributed to this result.
First, a strong rebound of nearly 10% in the S&P 500 offset some of the positive impact of low interest rate policy on the yen.
Second, despite the recent adjustment in U.S. bond yields, market expectations indicate that entering the new year, U.S. bond yields will remain relatively high, interest rate volatility is low, and U.S. Treasury yields are strong. This macro background will obviously increase the downward pressure on the yen.
