US outperformance continues

The economic divergence between the US and the rest of the world has become increasingly pronounced. The latest US inflation prints highlight that underlying inflation pressures seemingly remain stickier than in most other parts of the world supported by a strong US labour market. As a result, US rates have continued to rise with markets now expecting less than 45bp worth of cuts for 2024, down from 150bp at the beginning of the year. While there are signs of the global manufacturing cycle recovering, a softening in some leading indicators is broadly in line with our expectation of a temporary and mostly inventory-driven upturn rather than a new manufacturing boom. Oil prices have tracked higher over the past month now trading close to 90 USD/bbl. We see limited further topside to oil prices as the US could halt its buying of oil for its strategic reserves and potentially start selling again. A further rise will likely also tempt OPEC+ members to increase supply and weaken compliance to the current output reducing strategy.

The USD has been the big winner over the past month, with EUR/USD breaking firmly below the 1.07 mark on the back of US economic outperformance, higher energy prices and markets pricing out cuts from the Fed. Scandies have continued to face headwinds from higher USD-rates with a higher oil price failing to notably support the NOK. The JPY continues to perform poorly amid global rates moving higher, which has sent USD/JPY to new decade highs even as Bank of Japan has exited its negative interest rate policy.

Outlook: Temporary weaker USD, headwind to scandies

In the near term, we see the case for lower USD rates as we believe markets underestimate the potential for a summer Fed rate cut. If proven right this should yield some temporary support to EUR/USD. That said, the potential is limited and we maintain our long-term case for a lower EUR/USD based on amongst other things the structural case for stronger US growth dynamics as a function of productivity-, labour force- and terms-of-trade developments. We expect EUR/NOK to move higher over the year not least based on the cocktail of below-trend global growth and contractionary global monetary conditions. 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 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 and US inflation. 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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