Mon. May 29th, 2023

Nordea notes that there was a broadly hawkish stance from the Federal Reserve at last week’s policy meeting with a determination to control inflation and comments that rates are expected to move above 5.00%.
The bank, however, notes that there was no change in market pricing with futures indicating that rates will peak below 5.0% and the markets not believing the Fed commentary.
bannerAccording to Nordea; “The reason could be due to Fed’s new economic projections: the upwards revision of unemployment in Fed’s Summary of Economic Projections displayed a committee being more forthrightly in acknowledging the economic pain involved in solving the imbalances in the economy.
It adds; “Markets are thinking weaker activity will send inflation lower, reducing the need for more rate hikes from the Fed.”
In contrast, there was a more hawkish reaction to the ECB policy decision and guidance from Bank President Lagarde
Nordea notes; “Christine Lagarde had much more success in pushing interest rates higher than Jerome Powell.”
The bank notes; “It is clear that investors are adjusting their expectations of the ECB, while still being sceptical on the Fed.”
In this context, overall yield spreads have moved in favour of the Euro which has benefitted the currency.
The degree of confidence in the global economy and the performance of equity markets will also be an important factor.
In general terms, the dollar will tend to gain ground when equities weaken while the US currency will lose ground when equities strengthen.
Nordea expects optimism will prevail in the short term on seasonal grounds. It adds; “In fact, a high possibility of a new year rally in stock markets (which would favour a weaker USD) together with a rate differential which has moved in favour of the EUR imply a high likelihood for EURUSD to move even higher than the current 1.06.”
The bank sees scope for EUR/USD gains to 1.10 on a 1-month view.
Temporary Q1 2023 Setback, but EUR/USD above Parity
Nordea expects that risk appetite will be forced into a reality check after the New Year period. It expects that the pendulum will swing towards pessimism amid fears that higher rates will increase unease over the global economy.
Nevertheless, it still sees reduced scope for dollar gains with a more resilient Euro amid the more hawkish ECB stance.
According to Nordea; “we still maintain our downside bias in EURUSD in 3M to 6M as we see stocks taking a tumble lower on the back of higher rates than markets currently anticipate. Overall, EURUSD down to the 1.04 area seems more reasonable than 0.99 in the next 3M.”
Nordea expects optimism will return later in 2023; “Longer out, a successful reopening in China and a pause in rate hikes point toward a higher EURUSD. We see EURUSD at 1.13 by the end of 2023.”
Nordea has made no changes to its Euro to Pound (EUR/GBP) exchange rate forecasts.
As a result, there has been a marked increase in the Pound to Dollar (GBP/USD) exchange rate forecasts.
GBP/USD is forecast at 1.31 at the end of 2023 and 1.34 at the end of 2024.
Commodity currency forecasts are unchanged against the dollar which implies stronger Euro projections on the crosses.
The Norwegian and Swedish currencies are forecast to recover ground during 2023 and 2024.

Pair spot 3 mths Jun 23 Dec 23 Dec 24
EUR/USD 1.06 1.04 1.07 1.13 1.15
USD/JPY 136 143 135 125 120
GBP/USD 1.22 1.20 1.23 1.31 1.34
EUR/GBP 0.87 0.87 0.87 0.86 0.86
EUR/CHF 0.99 0.98 0.99 1.00 1.05
AUD/USD 0.67 0.65 0.68 0.72 0.75
USD/CAD 1.36 1.36 1.33 1.32 1.30
NZD/USD 0.64 0.60 0.63 0.67 0.70
EUR/NOK 10.45 10.60 10.20 9.75 9.60
EUR/SEK 11.00 10.90 10.90 10.70 10.50
USD/CNY 6.98 7.25 7.10 6.95 6.70

EUR/USD 1.06 1.04 1.07 1.13 1.15

USD/JPY 136 143 135 125 120

GBP/USD 1.22 1.20 1.23 1.31 1.34

EUR/GBP 0.87 0.87 0.87 0.86 0.86

EUR/CHF 0.99 0.98 0.99 1.00 1.05

AUD/USD 0.67 0.65 0.68 0.72 0.75

USD/CAD 1.36 1.36 1.33 1.32 1.30

NZD/USD 0.64 0.60 0.63 0.67 0.70

EUR/NOK 10.45 10.60 10.20 9.75 9.60

EUR/SEK 11.00 10.90 10.90 10.70 10.50

USD/CNY 6.98 7.25 7.10 6.95 6.70



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