Global Daily – New EUR/USD forecast

by: Georgette Boele

In this publication: Dollar sharply lower because the dovish Fed rate outlook resulted in…

… a surge into more cyclical and higher yielding assets. The Norges bank cut rates to support the economy…

…while the SNB stayed on hold but remains active in FX markets

 

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Dollar sharply lower

Since the FOMC decision on Wednesday the US dollar has fallen sharply. Financial markets have become accustomed to the idea that the Fed tends to move towards market expectations instead of the other way around. Therefore, investors are of the view that they will unlikely be surprised by a Fed hiking more aggressively than market expectations in the future. Our view is that the Fed will keep interest rates on hold this year. The lowering in the Fed’s dot plot following the FOMC meeting has been a major negative for the US dollar and positive for risky assets. The US dollar index has dropped by more than 2% while currencies of commodity exporting countries have rallied roughly by between 2-4%. These currencies profited as a result of US dollar weakness and the view that the Fed being on hold would provide a more benign environment for these economies.

 

18 Mar

 

New forecast EUR/USD

We now expect EUR/USD to be range-bound in the foreseeable future, at around 1.15. For a start, a further adjustment in Fed rate hike expectations could push EUR/USD towards the top of the range around 1.20. While the ECB could take action and ease monetary policy further given the risks to inflation. As a result, these forces will likely keep EUR/USD within a 1.10-1.20 range. The longer-term picture has changed for the US dollar. We think that the multi-year bull trend of the US dollar has come to an end. So if the range in EUR/USD is broken, it will likely be on the USD weakness side in our view.

 

Norges bank cuts rates as expected

The Norges Bank cut interest rates by 25bp to 0.5% as was widely expected. In its statement the central bank mentioned “The current outlook of the Norwegian economy suggests that the key policy rate may be reduced further in the course of the year. As the key policy rate approaches a lower bound, the uncertainty surrounding the effects of monetary policy increases. This now suggests proceeding with greater caution in interest rate setting. Should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative”. The Norwegian krone reacted in a volatile manner to the decision and the comments. In the end, it strengthened mainly because of higher oil prices. We think that this was the last reduction in rates by the Norges Bank. The gradual recovery in oil prices during the course of this year should improve the outlook for the economy as well investor sentiment towards the krone.

 

SNB on hold but to remain active in FX markets

The Swiss National Bank left interest rates on hold Thursday as was widely expected. The target for the three-month Libor remains at between -1.25% and -0.25%, and the interest rate on sight deposits at the SNB is unchanged at -0.75%. According to the central bank, “The Swiss franc is still significantly overvalued. The SNB will remain active in the foreign exchange market in order to influence exchange rate developments where necessary”. We expect the downside in EUR/CHF to be protected because of these  interventions. On the other hand, an improvement in investor sentiment should weigh on the franc. As a result we expect EUR/CHF to stay close to 1.10 in 2016