USD under pressure because of expectations of a later Fed taper
The US fiscal impasse weighed on the dollar. But after an agreement had been reached, the market aggressively adjusted its expectations on the Fed’s tapering from December to March, as well as reducing the degree of rate hikes in coming years. This pushed USD lower across the board, as yield spreads narrowed. The case for significant USD strength remains in place, but the move may be less substantial in 2014 and may take more time to materialize. The stars are still expected to align for the greenback over the coming months and quarters. We are optimistic on the US economy. Furthermore, we still expect the scaling back of stimulus to take place at the December FOMC meeting, even though the chances of a March move have increased. So if our December Fed view materializes, the USD will strongly recover towards year-end. Therefore, we left our year-end 2013 forecast unchanged at 1.28, but we have changed our EUR/USD forecast for the end of 2014 to 1.20 (from 1.10).
Stronger UK data supported GBP
Sterling rallied modestly versus the EUR last week, while it rallied strongly versus the USD on a general weaker USD sentiment. UK data were strong. UK house prices for August came in far above expectations. This outcome and slightly higher consumer price inflation more than outweighed the larger-than-expected drop in producer price inflation. Moreover, labour market and retail sales numbers also beat expectations. Meanwhile, BoE officials expressed concern about the housing market. Sir Jon Cunliffe, the freshly-approved BoE Deputy Governor responsible for Financial stability dismissed fears of a housing bubble, but stated that the property market needs to be monitored very carefully. MPC member Martin Weale said that he’s concerned about UK house price buoyancy. On the other hand, Chief Economist Spencer Dale said that that it is very unlikely that the BoE will raise rates in 2014. We keep our modest path of GBP appreciation versus the EUR in place, and now see a less strong USD appreciation versus the GBP in 2014.
Most negative news priced in the SEK and NOK
In Norway economic data continued to disappoint, while Swedish data were roughly in line with expectations. The Swedish krona (SEK) and Norwegian krone (NOK), however, showed a very modest appreciation versus the EUR. This could reflect that the negative economic news may be in the price by now. This week the Riksbank and Norges bank will decide on monetary policy. The market expects the Norges Bank to be somewhat more dovish than the Riksbank. This is reflected in some analysts expecting a 25bp rate cut to 1.5% for the Norges bank, in contrast to the unanimous call for no change at 1.0% for the Riksbank. A dovish surprise from either of these central banks will hurt the currency, while less dovish comments should support them towards our year-end forecasts. We judge that it will be difficult for the central banks to sound more dovish. Moreover, we expect investor sentiment to improve which should support the SEK more than the NOK. We keep our forecasts for EUR/SEK and EUR/NOK at 8.3 and 7.8 respectively.