Rising pressure on EUR/DKK
|US data blackout leaves markets in wait-and-see mode
Over the past month, the US government shutdown has resulted in a public data blackout, largely leaving the Fed in limbo. Amid an uncertain macro backdrop, the Fed is widely expected to deliver a rate cut at the October meeting, reflecting both market pricing and a continuation of its risk-management approach from September. This has supported a positive steepening of the US yield curve and left markets in a wait-and-see mode. At the same time, renewed global trade tensions have fuelled risk-off sentiment, driving a temporary sell-off in equities and cyclically sensitive currencies such as NOK, AUD, ZAR, and NZD. Mounting debt concerns in France and Japan have also weighed on sentiment.
Over the past month, EUR/USD has traded lower around the 1.16-1.17 range, driven by favourable US rate differentials and safe-haven flows. Fiscal and economic concerns in Europe and Japan have weighed on the EUR and JPY, reinforcing the USD as the preferred option. The risk-off environment has also been unfavourable for cyclically sensitive currencies. Among the Scandies, EUR/SEK has been rangebound, while EUR/NOK to a larger extent has found support from souring risk appetite and lower commodity prices. JPY has come under pressure, underperforming broadly across the G10 following the unexpected Takaichi victory. Lastly, EUR/DKK has risen towards the top of the historic trading range.
Outlook: Negative on USD and scandies
We continue to see EUR/USD on an upward trajectory, targeting 1.22 on a 12M horizon, supported by rate differentials, a recovering European asset market, reduced global demand for restrictive policy, continued tailwinds from hedge ratio adjustments, and waning confidence in US institutions. In the near term, however, we are tactically negative on the cross as we see the balance of risks tilted toward further USD strength. For EUR/SEK, weak cyclical growth and unfavourable rate differentials support a move higher, while the structural capital flow balance remains a medium-term headwind for SEK. For EUR/NOK we also maintain a positive long-term view, based on the divergence in relative unit labour costs that creates an underlying real appreciation pressure on the real effective Norwegian Krone. In the short term, global factors like US economic health and Fed policy direction pose topside risks to both EUR/SEK and EUR/NOK
Risks to our forecasts are predominantly tied to the US outlook. If the capital rotation out of US assets continues and a sharp US recession hits, EUR/USD could break substantially higher than our forecast suggests. In this environment, commodity currencies would also face a larger hit. Conversely, persistent resilient US data and/or renewed euro area weakness that could prompt the ECB to cut again this year could keep the USD stronger-for-longer. We highlight that a stagflationary shock to the US economy might not necessarily be positive for the USD - even if the Fed refrains from cutting rates (or delivers hikes) - as the US investment case in such a scenario would suffer.
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