As we move into 2024 and reflect on 2023 it is clear to see the continuous evolution within the FX market. 

U.S. dollar strength was evident throughout 2023, on the back of a stronger U.S. economy and rising U.S. Treasury yields. Despite various bouts of weakness, the greenback appeared resilient against most major currencies. Inflation, central bank activity and fresh market structures were all at the forefront of the FX market. Looking at the year ahead, what key themes are likely to take center stage and impact the FX market?

U.S. dollar strength – fading fast?

U.S. dollar strength was difficult for most major currencies to overcome in 2023, especially on the back of the Federal Reserve’s decision to hold rates steady from its September meeting and the gradual reduction of the rate of inflation. The question is how long the U.S. dollar strength will last into 2024. It could continue to outperform other currencies early in the year due to its defensive characteristics in a world of continued low growth and downside risks from tight central bank monetary policy. On the other hand, as the impact of higher rates filters through, it could mean U.S. growth slows down and the Fed assesses whether interest rate cuts are needed. Major currency pair USD/JPY may remain in focus given the varying U.S. rate expectations. CME FX primary markets across spot, futures and options saw increased action in the JPY towards the end of 2023. Maybe emerging market currencies will also get a chance to catch up.

T+1 settlement for the FX market – ready for a shakeup?

The testing period for the shift to T+1 settlement began in 2023 and is set to run until the planned implementation date at the end of May 2024 for the Equity market, which will represent as the leader for T+1. The shorter settlement cycle could suggest greater efficiency and minimize credit risks but is also likely to need major operational changes for organizations. The change is set to shake things up in the workflow environment, and the EBS platform team at CME FX are monitoring developments and preparing for any knock-on effects in FX markets.

Evolution of the FX market structure – complementary and transparent?

A big enhancement to the FX market is the unification of the FX businesses at CME Group. The restructure aligns futures, options and the EBS OTC FX businesses, with a focus on transparency, liquidity and trusted access. Changes to the primary central limit order book, EBS market, began in Q4 last year and will continue until mid-2024. These changes include faster market data for both spot and NDFs, changes to minimum quote life, new order types and tighter price increments in certain pairs, including EUR/USD. The NDF market will be consolidating both on-SEF and off-SEF liquidity into a single pool. The integrated business model will boost efficiency and provide complementary trading opportunities in the evolving FX marketplace. Detail on EBS market can be found here.  

The product launch of CME FX Spot+ is big on the horizon in 2024. It will be a firm, anonymous central limit order book initially offering the G7 currency pairs. Implication technology enabled through CME FX Link will represent futures liquidity in spot form and vice-versa. Connectivity and access for order entry and market data will be available, and a central prime broker will enable an all-to-all marketplace allowing for pre- and post-trade anonymity. Overall, CME FX Spot+ will provide OTC users access to FX futures liquidity, make OTC liquidity available to FX futures participants in FX Link and increase the value of EBS connectivity. The CME FX product suite can be found here.

Emerging markets – room for some upside?

As inflation trends lower, there may be room for the continuation of the easing cycle by emerging market central banks. The EM world can be fragmented and not every country will benefit from market conditions. It will be an interesting space to watch over 2024, especially as the U.S. dollar theme rolls out as we get into the year. When currencies are rapidly fluctuating, CME’s transparent EM FX markets offer quick access to reliable pricing and liquidity on-screen and around the clock, providing significant flexibility for participants. From EBS market’s exceptional access to liquidity and expanding range of Non-Deliverable Forwards (NDFs), to efficient margin offsets available across EM products in futures and options, the CME FX platform offers excellent service to a wide range of market participants.

The FX retail market – new areas of growth?

The FX retail market is one to watch and CME Micro FX futures help to diversify a portfolio with deeply liquid FX products at a lower contract notional. For retail investors, the ability to scale positions up or down precisely and the flexibility to convert in and out of larger contracts is paramount. At CME Group, Micro FX futures allow traders to tap into the world’s largest regulated FX marketplace. There has also been an increase in FX options trading at CME by the retail community looking to take advantage of volatility in the FX options market. The launch of CME’s Tuesday and Thursday FX options expiries in 2022 is continuing to help participants fine-tune their hedging or trading strategies.  Market commentary also provides the latest insights and allows traders to keep track of this fast moving, active market. CME FX micro products and commentary can be found here.

As always, a new year brings uncertainty, questions we want immediate answers to, the need to be patient and a plethora of new opportunities. Life may be easier if we had a crystal ball but choosing to see the unpredictability as exciting rather than scary may just be the best way to approach the FX market in 2024.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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