Continued scepticism sustains negative Dollar outlook
Solid macro backdrop and monetary policy divergence
The US economy remains on a solid footing. January's jobs report showed 130k new jobs and unemployment falling to 4.3%, reducing immediate pressure on the Fed to cut rates despite structural headwinds in employment growth. Globally, improving manufacturing data and softer inflation have bolstered risk sentiment. However, AI disruption fears have weighed on part of the technology heavy equity sphere while EM stocks have rallied. Political noise from the Trump administration has eased ahead of the midterms: Warsh's Fed chair nomination has calmed independence fears, immigration policy rhetoric has eased, and tariff threats have diminished. At the same time, monetary policy divergence has emerged as a key theme. The Reserve Bank of Australia hiked rates, while higher-than-expected inflation in Norway has shifted market pricing towards a more hawkish stance. In contrast, the Riksbank and the Bank of England held rates steady, both leaning dovish, though the latter with a narrow vote split.
Over the past month, the USD has decoupled from macroeconomic data, allowing EUR/USD to briefly trade above 1.20 before retracing to around 1.18. Recent cross-sectional performance has favoured currencies with a high correlation to manufacturing, with NOK, NZD and AUD emerging as the relative winners in the G10 space. In Scandies, NOK has outperformed amid a favourable combination of USD weakness, higher energy prices and strong near-term momentum. SEK has rallied, partly driven by capital inflows into Swedish equity funds, redirecting funds from US and global counterparts.
Outlook: Negative on the Dollar and Scandies
Over the medium term, we maintain our outlook for EUR/USD to trend higher, underpinned by narrowing real rate differentials, a recovering European asset market, reduced global demand for restrictive monetary policy, persistent tailwinds from hedge ratio adjustments, and fading confidence in US institutions. For EUR/SEK, we expect a gradual move higher towards 11.00 during the year, as SEK faces headwinds from capital flows and the prospect of a dovish Riksbank. For EUR/NOK, we still believe the trend trajectory is higher - driven by the considerable unit labour costs divergence - but we highlight that volatility around this trend is likely to be considerable.
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 hit, 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. Finally, we will closely monitor geopolitical events, developments and uncertainty related to AI, and broader signs of a turning global cycle.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
