If you are a forex trader in Canada, then you’ll agree that the overarching narrative in 2023 centered around inflation and central bank interest rates. Most certainly, those were global issues, and they were the dominant drivers of the multi-trillion-dollar daily forex trading markets in 2023.
Of course, plus ça change: Interest rates and inflation are always important factors in forex trading. But in 2023, they were the dominant narrative, and with good reason. Yet, the fundamentals of forex trading tell us that we should not only look at those factors. And that’s important to bear in mind as we go through 2024, particularly as inflation starts to ease in most advanced economies.
Indeed, there are many important macro factors that may play a role in forex trading in 2024, and, as always, there may be a few surprises. But before looking at those, let’s take a quick refresher at some of the main points that drove the forex markets last year.
Inflation: It was the specter that we just could not shake in H2 2022 and H2 2023. However, it did ease towards the end of last year. Nonetheless, traders were constantly monitoring CPI (consumer price index) reports to gain clues about the direction of travel.
Interest Rates: Interest rates and inflation largely go hand in hand, so there was an element of predictability when central banks made their decision each month. However, as inflation began to cool in H2 2023, the emphasis shifted to interest rate hike pauses.
GDP/Economic Performance: The economic performance of a country still mattered in forex in 2023. However, it nonetheless fed into the dominant narrative of interest rates. Broadly speaking, economic underperformance was ‘good’ for a country’s currency in 2023. Why? Because traders bet that economic woes would force central banks to cut interest rates.
2024: A Changing Macro Environment
The chart below shows inflation in Canada across a 25-year period. While there were bumps in the road in the mid-2000s and during the Great Recession of 2008, you can see just how unprecedented the inflation problem was – is – in this early part of the 2020s. However, as you can see, it is almost back within the normal range.
The point, as such, is that inflation is, as it stands, inflation is no longer going to be the overarching driver in the forex markets. The job of central banks may not be over, but most have breathed a sigh of relief that inflation has been tamed, and it has been tamed with relatively “soft landings” in the majority of advanced economies.
But what may be the macro drivers in 2024? Let’s look at some possibilities:
Interest Rate Cuts. The undoubted theme of forex trading in early 2024 is centered around predicting which central banks will start cutting rates first. This is termed a pivot in economic parlance. In Canada and elsewhere, this is a hugely significant question, not just for forex but for the wider economy. There may, however, be a sting in the tail. Rate cuts may be enforced by economic underperformance rather than hitting inflation targets, and that could get messy.
The Year of Elections: General elections are expected to be held in 64 countries in 2024. Time Magazine said it best when stating, “2024 is not just an election year, It’s perhaps the election year.”. Countries with general elections include the USA, the UK (expected), India, Brazil, Pakistan, and Russia. These countries cover 49% of the world’s population and around two-thirds of the global GDP. Most of the focus will go on the US election in November, but polling will move forex pairs in the months preceding the election.
A Return to ‘Normalcy’: We mentioned earlier that bad economic indicators were ‘good’ for a country’s currency in 2023, but we may see a return to the normal rules as the focus moves away from interest rates and inflation. As such, weaker economic data may no longer be supportive. Unemployment (also see below) may start to weigh on certain currency pairs.
The Potential of War: Much of the focus has gone on the conflict in Israel/Gaza and in Ukraine. Yet, we may see the focus move elsewhere in 2024. Tensions between China and Taiwan, which also has an election (January 13th), are threatening to spill over. Bloomberg recently put the cost of war to the global economy at $10 trillion, about 10% of global GDP. It may feel unlikely, but it is not impossible.
The AI Revolution: Finally, we come to the biggest wild card. A survey carried out by ResumeBuilder at the end of last year found that 37% of businesses that use AI replaced human employees with the technology in 2023. The same survey found that 44% of businesses expected to make layoffs due to AI replacement this year. The technology could offer a huge shock to global labor markets across various industries. Indeed, one of the most interesting predictions is how AI could threaten “safe” jobs across the globe.
Conclusion: Why It Matters
The above is only a small sample of some of the macroeconomic issues that could impact forex trading. As every trader knows, they will add up to a complex ecosystem of narratives and fundamentals. Of course, not all those events are guaranteed to happen or even probable. But the important point to recognize is that forex traders have a broader macro picture for 2024 than they did for 2023. Again, it’s crucial to understand just how much focus went on CPI prints and central bank meetings last year – it was the only game in town. Now, traders can expect rate cuts, but they also have another set of challenges, including some they have not faced before. However, many of these macro events may cause volatility in forex markets. And for good traders, volatility can be a gift.