Fed Blink Puts USD On Weakening Path

EUR/NOK . The NOK has suffered from foreign selling amid the escalating trade war, lower oil prices and falling global inflation expectations. The decoupling from relative rates has been very pronounced over the past year. While factors such as a slowing China and the existence of more attractive commodity carry alternatives in CAD, AUD and NZD partly explain the NOK weakness, we still think the fundamental NOK backdrop is key to remember. Namely, as long as the global economy does not fall into a recession, global petroleum industries collapse or Norwegian competitiveness significantly erode, then the NOK will have to strengthen for Norges Bank to fulfil its inflation target ( FX Strategy – Why is the NOK so weak? , 28 May). What is more, in our view, a sustained USD weakness trend would aid that move even if it is not a necessary condition for NOK strength. We leave unchanged our EUR/NOK forecast profile at 9.70 in 1M, 9.60 in 3M (NYSE:MMM), 9.40 in 6M and 9.30 in 12M.

EUR/SEK. As we expected, the SEK recovered from the mid-May high above 10.80 and EUR/SEK is now close to our 1M target at 10.70. The inflation outlook remains a challenge, which, in our view, will probably force the Riksbank to postpone planned rate hikes. As international central banks soften, the scope for the Riksbank to keep its relatively upbeat rhetoric is shrinking by the day. This said, we do not expect any major policy revisions in the July meeting. On balance, we keep our forecast profile intact at 10.70 (1M), 10.80 (3M), 10.90 (6M) and 11.00 (12M). A pronounced global risk-off environment has potential to send the SEK down the drain, but this effect is partially balanced by investors scaling back carry positions as SEK has clearly become a funding currency these days.

EUR/DKK. In our view, weak equity markets, an unresolved trade war and a large discount in FX forwards are likely to keep EUR/DKK elevated over coming months, at 7.4670 in 1M and 7.4630 in 3M (revised up from 7.4590). On a 6-12M horizon, we expect the parties to strike a trade deal and the global macroeconomic backdrop to strengthen, which, in turn, we expect to send EUR/DKK back below the central rate – 7.4590 in 6M and 7.4550 in 12M.

EUR/USD. In our view, the Fed has blinked and rate cuts are coming from July. At the same time, the ECB lacks answers on what to do about the risk of a de-anchoring of inflation expectations. The Fed-ECB monetary policy pergence should pave the way for a higher EUR/USD over the coming 6M. We forecast EUR/USD at 1.14 in 1M and 1.15 (revised up from 1.13) in 3M. We forecast EUR/USD at 1.17 (revised up from 1.15) in 6M and 1.17 (unchanged) in 12M. The Fed initiating an easing cycle would do most of the lifting in 1-3M, while a US-China trade deal should weaken the USD in 3-6M.

EUR/GBP. We believe markets will downplay the risk of a no-deal Brexit as a driver for GBP in the month(s) ahead. Instead, we expect slightly weaker UK data, global sentiment and the ECB to drivers for taking EUR/GBP higher. In turn, we have revised our expectations for the GBP to a weaker path and forecast EUR/GBP at 0.90, trading in a range of 0.86 (if Brexit related news improve) to 0.91 (much weaker data and/or by pricing a higher probability of no-deal Brexit) in the coming months.

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