Nordea predicts a possible rate increase by the Fed in December 2023, with rate cuts expected in the second half of 2024. The ECB is not expected to increase rates further, with the first rate cut anticipated in Summer 2024. Nordea believes that bond yields are close to cycle highs and expects US 10-year yields to trade closer to 4.5% than 5% in the coming months. The bank also suggests that the USD's fortunes will reverse next year due to the unlikely sustainability of US economic outperformance. Nordea expects further weakening of the Yen in the short term, but a reversal is more likely when major central banks turn dovish. Risk conditions, such as a correction in the stock market and global growth declining more than anticipated, will be important for both currencies. Nordea also expects Scandi FX weakness to persist until next year, when lower global inflation and lower global interest rates are anticipated.
On the other hand, BNP Paribas expects the US currency to maintain a firm tone in the short term due to US economic out-performance and capital inflows. In the medium term, BNP predicts a decline in the US currency due to normalisation of interest rate differentials and global growth recovery. BNP believes the Euro will be undermined by the relative performance of the US and Euro-Zone economies. The bank also considers the yen to be undervalued and expects the Bank of Japan to be the most hawkish global central bank in 2024. BNP forecasts a recession in the UK in H1 2024, leading to a weakening of the GBP. It predicts relatively narrow trading ranges for EUR/GBP. BNP notes a dovish stance from the Bank of Canada and expects earlier or deeper interest rate cuts by the Reserve Bank of New Zealand. It also sees a recovery in the Swedish and Norwegian currencies later in 2024.
While Nordea and BNP Paribas both acknowledge the impact of US economic outperformance on the USD, they have divergent views on the future direction of the currency. Nordea expects the USD's fortunes to reverse next year, while BNP Paribas predicts a decline in the US currency in the medium term. Both banks also have different outlooks on other major currencies, such as the Euro, Yen, and GBP. The contrasting forecasts highlight the uncertainty and complexity of the foreign exchange market, with multiple factors influencing exchange rates.
Nordea has revised its Pound to Dollar exchange rate forecast for the end of 2024. The bank now predicts that the exchange rate will retreat to 1.23, compared to the previous forecast of 1.29. Nordea is concerned about underlying US inflation trends and does not expect the Fed to cut interest rates until December. The bank also notes inflation risks surrounding the November election and the potential for increased tariffs. If market expectations of an August Bank of England rate cut intensify, yields will move against the Pound if there is no cut in US rates. Nordea expects that if the Fed is unable to cut interest rates, risk appetite will deteriorate, which would undermine the Pound. [adbb3d1f]
Sources:
- Nordea: [46f020e5]
- BNP Paribas: [a3abb664]
- Exchange Rates UK: [adbb3d1f]