Near-term USD weakness as the global easing cycle commences

SNB kicks off G10 easing cycle

Global rates have continued to rise amid markets scaling back expectations of rate cuts. The move has largely been driven by the US economy remaining on a strong footing underpinned by a still tight labour market with inflationary pressures showing signs of persistence. However, recent activity data has started to show signs of weakness. At the March meeting the Fed maintained its easing bias whilst highlighting the possibility for rate cuts despite strong activity levels. As the first G10 central bank, the SNB has lowered its policy rate by 25bp to 1.50%, while the BoE firmly opened the door for rate cuts. Conversely, the BoJ hiked its key policy rate to end its negative interest rate policy and scrapped its yield curve control following a long period of above 2% inflation in Japan and rising wage growth.

The USD continues to be closely tied to movements in global real rates with EUR/USD trading close to the 1.08 mark. GBP has faced headwinds recently amid dovish tones from the BoE. Scandies have continued to perform poorly and despite widening rates spreads and a higher oil price the NOK has been a clear underperformer in Majors space this year. EUR/CHF reached the highest level since July 2023 following the SNB initiating its cutting cycle. The JPY failed to strengthen following the hike from the BoJ with USD/JPY, in a move that was largely anticipated by markets.

Outlook: Temporary USD weakness, weaker scandies

We maintain our case of a strategic case for a lower EUR/USD in the medium term. In the near term, we think the potential for an early Fed cut poses upside risk to the cross, and perhaps markets have also become too optimistic on US exceptionalism and too pessimistic on economic data from the euro area and China. In the absence of a global growth re-acceleration above trend potential, we continue to see the EUR/NOK balance of risk skewed to the topside and target the cross at 12.10 in 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 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.

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