Monday, May 9, 2022 10:40 AM EDT
Photo by Ibrahim Boran on Unsplash
FX markets have really started to feel the squeeze as the Fed pushes ahead with aggressive tightening at a time when events in Europe and China are repricing global growth prospects lower. This is clearly a bullish environment for the dollar – a currency that tends to correlate inversely with global growth. Expect the dollar to stay strong this summer.
Executive summary
In what should be a difficult period for equity and credit markets, we would expect the dollar to stay strong this summer. After all, we are still at the stage of front-loaded Federal Reserve tightening. Doubts about the end of globalisation and the need for structurally higher interest rates should also maintain FX volatility at its recently elevated level.
In practice, we think this means that EUR/USD can trade a pretty wide range for the rest of the year – perhaps 1.00-1.10 with a downside bias over coming months. USD/JPY gains over 130 may well be harder work now, but GBP looks increasingly vulnerable given that investors still price the Bank of England's Bank Rate well over 2.00% this year.
Elsewhere in Europe, currencies in the Central and Eastern Europe region remain very volatile and under pressure. The zloty would be our preferred pick on a longer-term view, while the forint remains fragile as twin deficits return to focus. Personnel changes at the Czech National Bank have raised uncertainty around the path of the most favoured currency – the Czech koruna.
Risk aversion and the China slowdown are making life hard for many commodity currencies. Most vulnerable look the likes of the Brazilian real and South African rand – with close links to China. The renminbi itself remains fragile, with USD/CNY risk to 6.80.
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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...
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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. ING forms part of ING Group (being for this purpose ING Group NV and its subsidiary and affiliated companies). The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
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