ING becomes constructive on the dollar, lower euro-dollar forecasts from 1.28
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Foreign exchange analysts at ING Bank SA announced a revision to their US dollar forecast and told clients they had become more constructive about the currency.
The change in position on the greenback is particularly relevant to the bank’s euro-dollar (EUR / USD) exchange rate forecast, which was lowered from a previous high seas target of 1.28.
“With the dollar being bearish since April 2020, we feel compelled this month to sketch a more positive medium-term scenario,” said Chris Turner, Global Head of Markets and Regional Head of Research for UK and the EEC at ING.
“At the heart of it all is the likelihood that the Fed’s exit streak from ultra-accommodative monetary policy will be more compressed than it would like us to believe,” adds Turner.
The US economy is currently generating inflation well above the Federal Reserve’s 2.0% target, leading markets to expect the Fed’s interest rate hike in the coming months.
Traditionally, higher interest rates are deployed by central banks to slow economic growth, which in turn slows down prices. Higher interest rates in turn attract capital from foreign investors who raise the value of the dollar.
The U.S. Consumer Price Index rose at an annual rate of 5% in May, down from 4.2% in April and the highest since August 2008.
In response to the warming economy, Fed policymakers at their June meeting advanced their forecasts for the first interest rate hike to 2023 compared to 2024 previously, a move that coincided with a sharp appreciation. of the US dollar.
The dollar had been lagging for much of 2021, but the Fed’s change in stance meant it was one of the best performing currencies by mid-year, and analysts are more and more of the opinion that the lowest are there.
ING says they expect the next Fed rate hike to take place in the third quarter of 2022, which means that if they are right, the market will have to push rate expectations forward again, which would likely generate new ones. earnings in dollars.
“The earlier than expected Fed tightening cycle suggests that our previous EUR / USD end-2021 forecast of 1.28 was just too high,” Turner said.
Meanwhile, a shift in investor sentiment towards the dollar has been reflected in positioning data which shows that the speculative segment of the market is now a net buyer of the currency.
The most recent CFTC positioning dataset showed that the dollar positioning went from a slight net net to a net long last week:
Image courtesy of Rabobank.
“This move follows the trend that has been evident since mid-June and the hawkish tilt of the FOMC. The change in stance highlighted just how poorly positioned the market was for the Fed’s change in tone,” said Jane Foley, Senior FX Strategist at Rabobank.
Despite a more constructive change in the US dollar, ING nonetheless expects EUR / USD to climb back above 1.20 in the coming months.
“November and December are seasonally weak months for the dollar and assuming the eurozone recovery goes as expected, EUR / USD should still move up towards the 1.23 area,” Turner said.
Turner says 1.17-1.23 may well be the approximate trading range for EUR / USD for the next six months.
The Fed is widely expected by the market to announce in detail how it intends to end its asset purchase program at its September meeting, a process known as tapering.
Tapering is a necessary first step on the way to a possible rate hike.
But Turner says tapering doesn’t necessarily mean the dollar has lifted.
“The big, broad bullish reversal in the dollar should really start in 2Q22 – six months before the Fed starts to tighten,” he said.
Turner predicts EUR / USD at 1.20 in one month, 1.23 in three months, 1.23 in six months and 1.20 in 12 months.