USD sell off to prove temporary
|Too soon for the Fed to pivot policy in a dovish direction
The narrative of a potential Fed policy pivot in a more dovish direction has dominated markets While G 10 central banks continue to tighten monetary policy both Norges Bank and Bank of Canada have slowed their hiking pace Global demand continues to slow yet inflation remains at historically elevated levels across most regions In the US, the latest inflation print fell substantially short of expectations triggering the largest single day drop in US 2 Y rates since 2008 Meanwhile, the US labour markets remain strong and we still think it is premature to declare victory in its fight against above target inflation European natural gas prices have come sharply lower over the past months amid a drop in demand, mild weather conditions and inventories starting to fill up Speculation of China abandoning its zero covid policy has given a boost to the heavily battered Chinese equities and industrial metals.
USD coming under pressure
Price action in FX markets over the last month has been driven by not least the Fed pivot narrative but also renewed focus on a Chinese reopening and lower energy prices have been important catalysts EUR/USD has moved sharply higher and cyclically sensitive European currencies in the likes of NOK, SEK, HUF and PLN have rallied strongly GBP has largely retraced its initial sharp move lower as the newly elected government is set to deliver a more firm stance on fiscal discipline CNY has recovered some of its recent weakness.
Despite recent USD headwind, we continue to forecast EUR/USD at 0 93 in 12 M on the back of a substantial negative terms of trade shock to Europe vs US, tightening of global financial conditions and downside risk to euro area growth We expect EUR/SEK to move higher over the coming months to 11 20 on the back of weak growth dynamics, relative monetary policy and the Riksbank’s disregard for SEK weakness On a 6 12 M horizon, we see a recovery and sustainable support to risk assets and the SEK We pencil in a rise in EUR/NOK over the coming 3 months driven by a slowdown in growth, a European recession and volatile asset markets but pencil in an eventual NOK rebound in 2023 We forecast EUR/GBP at 0 86 in 12 M, but expect fragile risk environment, too aggressive market pricing on BoE and lower energy prices to weigh on GBP in the near term.
A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions Risks to this assumption include global inflation pressures fading fast, renewed focus on China easing, a global capex uptick and/or industrial production increasing, which could underpin a new reflation leg higher.
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