Political unrest

The unexpected announcement of a French snap election has sparked renewed concerns about eurozone public debt levels. European equities have underperformed global benchmarks considerably and the single currency has suffered. US economic data has been a mixed bag of news with inflation pressures easing but with the job market remaining resilient; yet USD rates have declined over the last month. Despite ECB delivering its first cut in the June, sticky services inflation coupled with tight labour markets remain a concern for ECB chief Lagarde. On a broader scale monetary policy signals from G10 central banks have increasingly diverged with a hawkish Norges Bank firmly closing the door for rate cuts in 2024, a dovish SNB delivering its second cut of the year and Bank of Canada launching its cutting cycle. The oil price has risen again to around USD 85 USD/bbl on the back of improved mood in the financial markets.

The increased focus on eurozone public debt concerns has sparked broad EUR weakness with spill-over to the CEE currencies. On the other hand, the USD and the CHF have been among the outperformers. The combination of lower USD rates and eurozone public debt concerns amid decent risk appetite have been supportive for the Scandi currencies over the last month. Additionally, a rise in oil prices and a hawkish Norges Bank has provided tailwind for the NOK.

Outlook: We favour the downside in EUR/USD in H2

We still believe that fundamental factors point to a lower EUR/USD in the medium term, including the structural case for stronger US growth dynamics. In the near term, we expect the cross to continue trading within a range, but we slightly favour the downside due to the EUR leg potentially remaining fragile owing to the political risk premium. While NOK sentiment could remain positive near-term, we still highlight that the combination of weak global growth and contractionary global monetary conditions very rarely constitute an environment where NOK rallies persist for long. Akin to the NOK, we pencil in SEK weakening on the back of the cyclical backdrop and relative central bank pricing, 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 will closely monitor European political developments. Also, an eventual 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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