Global environment and strong US economy to support USD
Markets continue to scale back on expectations of rate cuts
Global rates have continued to rise amid markets scaling back expectations of rate cuts supported by hawkish tones from central banks. While our view continues to be that market pricing remains too aggressive on most G10 central banks, the recent repricing increasingly aligns with our view. The US economy remains on a strong footing underpinned by a still tight labour market. Turmoil connected to the New York Community Bank has reignited concerns related to regional banks in the US. While the incident appears to be contained it highlights the vulnerability of the sector. Over the past month, the war in the Middle East has continued and tensions have risen with the US and UK initiating air strikes targeting Houthi rebels in the region. However, the market impact has proven limited at this stage.
The USD has been the clear outperformer so far this year as markets have repriced the outlook for global rate cuts and as the US economy continues to show underlying strength. Likewise, GBP has benefitted from a sharp repricing of the Bank of England amid a continued hawkish vote split and inflation remaining elevated. On the other hand, the cyclically sensitive Scandies have faced headwinds since the beginning of the year. JPY continues to face headwinds from a dovish Bank of Japan and higher global real rates. EUR/DKK briefly spiked above the central rate, a move we largely attribute to Novo Nordisk related news and flows.
Outlook: Stronger USD, weaker Scandies
We maintain our case of a strategic case for a lower EUR/USD in the medium term. While our forecast for the Fed and the ECB suggests upside risk to the cross in Q1, we stress that a broader central bank pricing could prove to be more crucial for EUR/USD. We therefore see any rally in the cross as temporary. For NOK, we see relative rates, below-trend growth globally and that markets should price in tighter global monetary conditions as headwinds that are likely to push the cross higher on a 3-12M horizon. We do not see the trigger for a sustainable turnaround in the next 12M. We pencil in SEK weakening on the back of the cyclical backdrop, relative central bank pricing and the structural flows outlook, targeting the EUR/SEK at 11.60 in 6-12 months.
Risks to our forecasts primarily lie in the combination of a sharp drop in core inflation and a more resilient global economy than what we pencil in. In the near-term, we closely monitor developments in global manufacturing following tentative signs of a turn in the global manufacturing cycle. Also, a much harder landing than what we pencil in would require a sharp easing of global monetary conditions, which would likely entail a much weaker USD after an initial squeeze higher.
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.
