Near-term risk of higher EUR/USD
Eying the end to the global hiking cycle
The past month, central banks have increasingly signalled the end to their rate hiking cycles while pushing back on rate cut expectations. While the Fed, BoE and SNB opted for an unchanged policy rate decision in September, both the Fed and Norges Bank delivered a slightly hawkish message signalling that policy rates more likely than not will be hiked one additional time later this year. The ECB delivered a final dovish hike, implicitly closing the door to further hikes. Oil prices continue to move higher with Brent Crude now trading in the mid-90s (USD/bbl). Importantly, the rise in oil has solely been driven by a tight supply side, which marks a negative global supply shock to the global economy. The global growth outlook is increasingly weakening, but there have been tentative signs of stabilisation in manufacturing relative to services.
USD rally has continued
Over the past month, the USD rally has broadly continued supported by US growth outperformance and a relatively hawkish Fed vis-à-vis the ECB with EUR/USD now trading below the 1.07 mark. While commodity prices have risen the past month, the commodity-sensitive cluster has performed poorly, highlighting the importance of the global backdrop. EUR/SEK once again reached all-time highs with the announcement of the hedging of the FX reserve initially providing little support to SEK. CNY has broadly stabilised as China has taken more measures to stop the CNY depreciation and as stimulus measures have calmed financial crisis fears.
We maintain our strategic case for a lower EUR/USD based on relative terms of trade, real rates and relative unit labour costs. However, in the near-term, we see some potential for topside risk to the cross on the back of peak policy rates, an improving manufacturing sector backdrop relative to the service sector, and/or easing China pessimism. In the near-term we think that EUR/SEK is overbought and look for a downside correction in the coming months. Over the medium-term we remain bearish on the SEK on the back of structural headwinds from the domestic economy and a gloomy global growth outlook. We maintain a long-term bullish view on NOK although the continuously postponed global growth slowdown means that this may take considerably longer to play out than previously envisioned. For the rest of 2023 we maintain a negative NOK view.
A key assumption is that of a re-tightening of global financial conditions. Risks to this assumption primarily lie in the combination of a sharp drop in core inflation and a more resilient global economy than what we pencil in.
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.
