Market guide: Vulnerable USD and scandies

U-turn in trade tensions sparks relief across markets

Since our last FX Forecast Update, 25 April, the dominating theme for markets has been a scale back on the Trump administration's trade policy initiatives. The policy shift is largely driven by the US-China de-escalation, following the easing of Trump's tariffs, and a more cooperative negotiation style. The policy shift has significantly improved risk-appetite in markets, resulting in equities rallying, credit spreads tightening, oil prices rising and the USD rebounding. While soft data shows signs of weakening consumer and business sentiment, hard data has yet to show the impact of tariffs, evident by a still solid US labour market report. The Fed can thus remain cautious as highlighted at the latest Fed meeting.

Over the past month, FX markets have seen a broad-based reversal. The downward trend in the USD has stalled, supported by a shift in risk sentiment following tariff easing with EUR/USD trading lower around the 1.12 level. The risk-on environment has been unfavourable for risk-off currencies like the JPY and CHF, with USD/JPY back to pre-'Liberation Day' levels. NOK has strengthened due to trade easing and higher energy prices, while SEK has remained relatively stable, caught between opposing forces of market optimism and USD appreciation. EUR/GBP has moved lower, driven by positive risk sentiment and tightening credit spreads amidst trade de-escalation and stabilisation.

Outlook: bullish on EUR/USD and EUR/Scandies

We have recently turned bullish on EUR/USD in both the near and medium term, now targeting a gradual move toward 1.20 over a 12M horizon. In the near term, easing tariffs and stretched short USD positions may lead to uneven dollar depreciation. Longer term, structural challenges like US and euro area political shifts, trade uncertainty, and capital rotation out of US assets suggest considerable USD downside. We maintain an upward sloping forecast profile for EUR/NOK but lower our forecasts, as the NOK rally potential is exhausted, and Norwegian assets face long-term challenges due to OPEC+ policy changes and high Norwegian labour costs. Despite SEK benefits from US-Europe rotation flows, weak growth outlook acts as SEK negative, we stick to a slight upward sloping profile for EUR/SEK, with a flat forecast in 1-3M and a slight rise to 11.20 over the next 12 months.

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, a full U-turn from the Trump administration could act as a USD positive although we think much of the confidence-damage to the US would not be fully unwound.

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