Euro and sterling set to gain on recovery – Westpac

The US dollar has experienced a volatile month of trade within clearly defi ned bounds. With major central bank action still a long way off, peaking US recovery momentum will weigh on DXY near term, lifting the euro and to a lesser extent sterling, economists at Westpac report.

US Dollar Index to drop to 87.3 

“We continue to expect the FOMC and other major central banks to 'hold the line' on policy for an extended period, anticipating that a US taper will not be seen until the second half of 2022 and that rate hikes will follow with a lag come 2024. Relative economic growth will arguably then remain the most compelling factor for FX markets in the period ahead. 

“We also recognise that the US is likely at, or very near, peak recovery momentum as fiscal stimulus is winding down. In contrast, the economies of the euro area and UK are growing in strength as is Asia, a region that also stands to benefit greatly from pent-up economic development.” 

“For DXY, we look for a further 3.2% fall to 87.3 in the second half of 2022 after which the US dollar is expected to stabilise and begin to grind higher as US monetary tightening takes effect.”

“Between now and September 2022, the euro is expected to gain 4.3% from 1.2179 currently to 1.27 on sentiment and strength in exports. Note, this is a level that is likely to create concern at the ECB over competitiveness, begetting a very slow policy normalisation process.” 

“Having outperformed the euro in recent months, future gains for the UK's sterling are likely to be modest, a 1.8% rise to 1.44 is our base case.”