International economic outlook: July 2021

Summary

Forecast Changes

• With the rise of renewed COVID concerns related to the Delta variant, we have made some changes to our foreign exchange forecasts. We believe the U.S. dollar's strength can extend further and anticipate gains versus most G10 and emerging currencies through Q3. However, should this wave of COVID cases recede by late 2021, we expect the greenback to revert to a softer trend in Q4, and indeed through much of 2022.
• We have made notable changes to some of our central bank forecasts. On the dovish side, we expect the European Central Bank (ECB) to ease monetary policy further at its December meeting, by increasing the purchase envelope for its Pandemic Emergency Purchase Program. In New Zealand, given strong data and hawkish central bank comments, we now expect multiple rate hikes this year. We also see faster rate hikes than previously observed in Brazil and Mexico.
• In addition to the altered near-term path for the greenback, we have lowered our medium-term euro forecast, given the ECB's commitment to maintaining accommodative monetary policy. We have become less positive on the Australian dollar as growth prospects have dimmed to some extent. In emerging markets, we have a more constructive view on the Peruvian sol, given reduced political risk tied to the election of Pedro Castillo, but continue to forecast a weaker South African rand.

Key Themes

• A significant pickup in COVID cases has altered the near-term outlook for financial markets. Given a more uncertain outlook, we believe the U.S. dollar's strength versus most G10 and emerging currencies can extend at least through Q3. Should the latest wave of COVID cases prove transitory, we expect the greenback to revert to a softer path for Q4, in part as several foreign central banks move to less accommodative monetary policy.
• We are not making significant changes to our global growth outlook at this time, and our global GDP growth forecast is unchanged at 6.3%. We do not expect governments to reimpose widespread restrictions, nor do we see consumers voluntarily restricting their own activities to a significant degree in response to the latest COVID developments.
• Should the latest COVID outbreak persist for an extended period, perhaps until the end of this year, there would be a higher likelihood of governments reimposing restrictions and central banks delaying their tightening plans. Global GDP growth could be lower by perhaps 0.25%-0.50%, and the U.S. dollar could see more sustained strength in this scenario. While we would emphasize this is not our base case, we will of course be monitoring COVID developments closely.

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