Possibly peak inflation worries with energy crisis looming
We have seen further signs of growth slowing and inflation rising hence lifting the overall stagflation risk. While US job growth has disappointed the details reveal a rising issue with labour supply which monetary policy cannot easily solve. Hence we still expect Fed to announce tapering at the November meeting and ultimately hike rates in H2 2022. Fears connected to the Chinese property market have eased amid rising confidence that the Chinese government will eventually step in to avoid a financial crisis. However, the recent turmoil adds new downside pressure on Chinese growth, which is already under pressure. Even if natural gas prices have come lower in recent weeks the energy crisis is increasingly spreading to the oil market with prices being supported by both substitution effects and an OPEC+ reluctant to lift supply.
USD and support to commodity currencies
The hawkish stance from the Fed continues to support our expectation of a stronger dollar and weaker Scandinavian currencies in H2. However, NOK has recently experienced a rally supported by Norges Bank initiating its hiking cycle as well as a surge in natural gas prices. EUR/SEK has also moved lower on the back of contagion from the NOK, now trading in the 10.10-10.20 range. EUR/GBP has been more volatile lately, but continues to trade around 0.85. USD/JPY recently climbed to 113, the highest level since 2018, with a rally in oil prices and further rise in US yields as the drivers.
We lower our profile for EUR/USD to 1.10 in 12M (from 1.13) as a reflection of broader market themes increasingly turning pro-dollar: global liquidity conditions tightening, PMIs set to move lower and central banks facing rising inflation concerns. We expect both EUR/SEK and EUR/NOK to move higher from here targeting EUR/SEK at 10.50 in 12M and EUR/NOK at 10.40 in 12M. We expect EUR/GBP to move lower as the USD-positive environment is usually benefitting GBP and keep our forecast intact at 0.83 in 12M.
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