This site is part of the Informa Connect Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 3099067.

IGM | Informa Global Markets
IGM on LinkedIn
Start free trial today
Menu
Free trial

Long-term FX forecasts - The June update

  • The USD has been a material loser since the last update in May, winning out only against the funder of choice YEN in the interim.
  • Recall on May 1, as fully expected, the Fed left interest rates unchanged in a range of 5.25%-5.50% overnight for a sixth straight meeting.
  • It has proved an overall USD weight since as Fed chair Powell downplayed the prospect of further rate hikes and kept hopes alive for a cut this year whilst acknowledging a burst of inflation has reduced policymakers confidence that price pressures are ebbing.
  • Fed speak since has proved pretty mixed with the likes of Kashkari stating policy is restrictive, but officials haven't entirely ruled out additional rate hikes though odds of (such a move) are quite low. Kashkari doesn't want to take anything off the table.
  • For now, markets appear to be pricing a first rate in either September or November and just one full -25BPs move in 2024 though there does appear some extra dovish risk.
  • The USD though has broadly underperformed of late amid some relatively soft/less than supportive/hawkish US data such as the 1.3% Q1 GDP, a 0.2% m/m core deflator and a 48.7 ISM manufacturing miss, which overall call into question the premise of ongoing US exceptionalism.
  • We will stay data dependent, with longer-term USD bears waiting for signs/concrete evidence of a sustained disinflationary trend.
  • EUR/USD has enjoyed a bounce too despite apparent weights of a likely first ECB rate cut of the cycle this week; a downgrade of French sovereign debt by the S&P and upcoming EU parliamentary elections.
  • The YEN stays an underperformer though USD/JPY peaks for now around 158.00 in the wake of the announcement that Japan spent a record Yen 9.8tln in the past month to support the beleaguered YEN.
  • GBP/USD is on the relative front foot after May's firmer than forecast UK CPI report, with markets paring expectations of a first BOE rate cut by Q3.
  • This month's SNB could be the archetypal coin toss meeting after March's surprising first easing of the cycle. The CHF market was moved by April's Swiss CPI beat of 1.4% y/y and recent comments from SNB's Jordan who suggested a weaker Franc is currently the most likely source of higher inflation and the Bank could counteract this by selling FX.
  • The CAD is a Q2 underperformer, both vs the USD and other members of the commodity bloc, amid perceived Fed-BOC rate cut divergence; US and Can growth and inflation differentials as well as broader market sentiment and global risk demand.
  • Could the Trump guilty verdict change voting expectations? GOLDMAN SACHS suggested in late May that (a Trump win in November) and more protectionist and inflationary policies in the US may fuel USD strength. The 'bar is higher for the USD to break lower pre-election uncertainty until confidence grows in the global outlook.

EUR/USD - Has enjoyed a bounce from recent 1.0788 lows (the 200-dma at 1.0789) despite apparent weights of a likely first ECB rate cut of the cycle this week; a downgrade of French sovereign debt by the S&P and upcoming EU parliamentary elections. Will it be a dovish, neutral or hawkish ECB rate cut? Will Lagarde offer clues on the timing of the next move and quantity of easing in 2024? Yield differentials will continue to be a driver here and still looks a net negative at this stage. We suspect very tentative GDP improvements in Q1 so far, including Germany (0.2% q/q), could be proving a mini-positive, while May CPI results showed sticky inflation persists here too (EMU CPI estimate 2.6% y/y vs 2.4% last, core up to 2.9%). Externally, China admin support for the property market could prove another positive, particularly if data improves through the remainder of the year. One negative risk we have been identifying, which we have suggested could leave the Euro south of at least one of 1.0981, 1.1139 and 1.1276 topside targets in 2024 is politics. And just around the corner, literally between June 6-9, are the European parliament elections. Thanks to ABN AMRO who have warned ahead that polls predict a shift to the right and a more fragmented parliament post-vote. Fragmentation will hinder coalition-building, with a stronger national focus making it more difficult to reap the benefits of the common market. We're on amber alert here, prepared to move higher, if we get a lasting break above some of those resistance points.

USD/JPY - April 29's 160.17 historic high looks a fair obstacle, as the 158.00 area grows in significance in the interim too in the wake of Friday's announcement of MOF intervention to the tune of a record Yen 9.8tln in the past month to support the beleaguered YEN. We see mixed drivers currently though and feel we need to nudge up forecasts from current behind the curve estimates. This week, labor cash earnings for April will be a focus, forecast to come in at 1.8% y/y vs a revised firmer 1.0% last (0.6%). So, wage growth will probably show acceleration amidst the agreed increase in spring wage negotiations (shunto). Last week, Tokyo CPI rose 2.2% in May y/y vs 1.8% last, all helping to maintain expectations of another BOJ hike in Q3. However, there is a feeling that the Fed outlook matters more and until the market returns towards a more dovish pricing such as an early Q3 first hike and perhaps three -25BPs rate cuts in 2024 a lasting correction is unlikely. Positive Cross/YEN flows have been intermittently notable as demand for carry intensifies in the tentatively improving risk sentiment and ongoing BOJ yield disadvantage environments.

GBP/USD - On the relative front foot after May's firmer than forecast UK CPI report of 2.3% y/y (and well watched 5.9% CPI services). There is another CPI report due before the next central bank verdict on June 20, but markets have already been paring expectations of a first BOE rate cut by Q3 after. Unchanged in May voter (and departing at the end of the month) Broadbent stated recently the MPC will continue to learn from incoming data and, if things continue to evolve with its forecasts - forecasts that suggest policy will have to become less restrictive at some point - then it's possible the Bank Rate could be cut some time over the summer. Another near-term focus is the surprise early July 4 UK general election call. Latest YouGov polls suggest the ruling Conservatives could be wiped out, with Labour set to win its biggest majority for 100 years of 194 seats. Such a mandate can cause problems of its own, but this time there have been no wild promises of fiscal shifts; Brexit is no longer a huge unknown and there appears little appetite for another Scottish referendum. Speculation continues as to why PM Sunak called such an early vote and there is a school of thought suggesting it could be because the current economic situation (0.4% m/m for March GDP) is the best it's going to be this year. A concerning view and a potentially GBP negative one.

EUR/GBP - For the very most part, an approximate 0.8500 - 0.9000 market still, as uncertain yield differentials continue to be monitored. As stated above, a-25BPs rate cut is widely expected from the ECB. However, another immediate move in July straight after is being questioned, as relatively sticky inflation, continued wage growth and surprisingly sturdy output could work to re-price matters. Historically, an expected rate cut can still lean on EUR/USD, but said weakness could be forward guidance driven. A data dependent or cautious approach could be viewed as a 'hawkish cut' and prompt a pullback towards mid-range. Meanwhile, this week's UK DMP 1-year CPI expectations for May will garner some interest, forecast at 2.8% vs 2.9% last and a softest on record (since May 2022). The OIS market is not pricing a full -25BPs rate cut until November. Perhaps a downside surprise could give this market a nudge that the perceived outlook is not dovish enough and prove a relative GBP weight. See above, politics could also be an impacter as well as growth differentials. In May, the OECD delivered a downbeat assessment of the UK economy. It said the UK will grow slower in 2025 than any other major advanced nation as stealth taxes and high interest rates weigh. The OECD cut its forecasts for both 2024 and 2025, to 0.4% and then 1.0% vs February's mid-ranking 0.7% and 1.2%.

USD/CHF - This month's SNB could be the archetypal coin toss after March's surprising first easing of the cycle. The CHF market was moved by April's Swiss CPI beat of 1.4% y/y and recent comments from SNB's Jordan who suggested a weaker Franc is currently the most likely source of higher inflation and the Bank could counteract this by selling FX. He also indicated that a rise in the natural rate of interest or r* poses a risk to the consumer price outlook. Headline inflation remains below target, but the SNB is viewed as the most reactive G10 regarding its inflation target. Last year's outperformer is G10's second worst player so far in 2024. From here, much will depend on which side of the market the SNB plays CHF wise. External drivers ahead could focus on the EU and those tentative positive signs on growth as well as those European parliament elections. Meanwhile, amid relatively low global volatility CHF looks unattractive on a risk/reward basis and with the YEN an obvious funder in a world looking for carry. Geopolitics related positive flows remain a possibility, but markets are taking 2024's wars and shock events in their stride presently.

USD/CAD - The Loonie is a Q2 underperformer, both vs the USD and other members of the commodity bloc, amid perceived Fed-BOC rate cut divergence; US and Can growth and inflation differentials as well as broader market sentiment and global risk demand. April's 90.4k Canada employment change was stunning, but Macklem and co are more focused on (the 2.7% y/y CPI in April) cooler inflation. Elsewhere, oil losses are beginning to stack up below the psychological Usd 80/brl mark amid OPEC+'s plan to return barrels to the market earlier than expected raised concerns about oversupply. GOLDMAN SACHS suggested in late May that (a Trump win) and more protectionist and inflationary policies in the US may fuel USD strength, while increased uncertainty over potential trade barriers could lean on CAD sentiment further given the openness of its economy.

For regular analysis and for access to all our data you'll need to subscribe to IGM. Request your free demo here.