Global Daily – Recovery of dollar ahead

by: Georgette Boele

In this publication: Recovery of US dollar versus euro and sterling expected. Dovish Norges Banks results in more krone weakness

170504-Global-Daily.pdf (148 KB)

Global FX I: Recovery of US dollar versus euro and sterling expected

So far this year, investors have scaled back expectations about Trump’s fiscal policy and this has weighed on the US dollar. Moreover, recently US economic data have come in below the expectations and this has also added to the downward pressure on the US dollar especially versus the euro and sterling. In the coming months and quarters we expect an improvement in US economic data, further rate hikes by the Fed, a rise in US Treasury yields and somewhat higher US real yields. This should result in a recovery of the US dollar towards 1.05 in EUR/USD and 1.25 in GBP/USD. However, the upside will be limited in our view as investors will probably take any rally as an opportunity to off-load long positions in the USD dollar. Next year, we expect the US dollar to weaken across the board because of lower US real yields, a deterioration in the US growth inflation mix and other central banks moving towards more restrictive or less accommodative monetary policy.

Since March, sterling has done well mainly because investors have closed some of the excessive net short positions in sterling. Despite this, speculative short positions are still huge. We expect that it is too early for an aggressive rally in sterling because of a number of reasons. First, uncertainty surrounding Brexit remains high and this will likely cap the upside in sterling. Second, we expect the US dollar to recover, also versus sterling. This will likely result in GBP/USD moving back to 1.25 (Georgette Boele).

Global FX II: Dovish Norges Bank results in more krone weakness

Today the Norges Bank decided on monetary policy. It left official rates unchanged at 0.5%. Moreover, the statement was on the dovish side. This outcome has resulted in extra downward pressure on the krone.  On 10 May inflation for April will be released. Lower than expected numbers will likely result in more krone weakness in the near-term.

Up to now, we have been of the opinion that the Norges Bank would deliver two rate hikes of 25bp each this year. However, taking another look at the recent developments, this has become unlikely. Therefore, we now expect that the Norges Bank will hike interest rates early next year. Our new EUR/NOK forecasts reflect this change in view. Our new year-end forecasts for 2017 and 2018 in EUR/NOK are 9.25 (previously 8.5) and 8.5 (previously 8.0), respectively. However, we still expect the Norges Bank to hike at least six months before the ECB. Even though the current momentum is negative, we are more optimistic about the krone’s outlook because we expect oil prices to recover, the Norges Bank to hike before the ECB and the fundamentals to remain strong (Georgette Boele).