By Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE
The greenback is round 10% off the highs seen in late September, and understandably the view is that the greenback bull cycle – which began summer time 2021 – is effectively and really over. Consensus expects the greenback to weaken additional this yr, and we agree.
Dollar bear development might choose up velocity within the second quarter
At the center of the bearish greenback view is the decision that the Fed will shift to a reflationary stance within the second half of 2023, US short-dated yields will fall and people yield differentials will transfer in opposition to the greenback. This story needs to be significantly acute for EUR/USD, the place sticky core inflation within the eurozone signifies that the European Central Bank won’t be contemplating price cuts till late 2024.
At the identical time, decrease pure gasoline costs have seen the eurozone phrases of trade enhance markedly and justify essentially greater ranges of the euro. Assuming that the China reopening story continues to evolve positively, we expect this confluence of things can drive EUR/USD steadily greater all through 2023. Most of the beneficial properties, nonetheless, might come within the second quarter, when US inflation is seen falling fairly sharply.
Sustained EUR/USD beneficial properties past 1.15 could also be tougher to realize within the second half – particularly if US debt ceiling negotiations are pushed to the restrict. Some would argue that the US debt ceiling is a bullish issue for the greenback – prompting a flight to high quality. Yet the proof from 2011 proves the opposite. Only have been the US very near an unthinkable sovereign debt default – i.e. excessive threat aversion – would the greenback derive any temporary profit.
USD/JPY ought to proceed to fall all year long. Bank of Japan conferences will show optimistic occasion dangers for the yen as buyers second-guess how shortly a brand new BoJ governing group will unwind the present very dovish settings. We goal 120 right here and the yen ought to outperform on the crosses each time the benign funding circumstances are challenged.
Sterling is buying and selling on a barely steadier footing because the UK authorities makes an attempt to revive fiscal credibility. The marginally higher world funding surroundings can be serving to the risk-sensitive pound. Sterling might maintain its beneficial properties by means of the primary half of the yr because the Bank of England stays hawkish. But clearer indicators of easing labour market and worth pressures within the second half of 2023 will see conviction construct of a forthcoming BoE easing cycle. EUR/GBP might be ending the yr nearer 0.90/91.
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Editor’s Note: The abstract bullets for this text have been chosen by Seeking Alpha editors.