US Dollar to Weaken, Euro to Rise, Pound Sterling to Recover: 2017 - 2018 Forecasts Updated at TD Securities

• Reference rates:
• Pound to Euro exchange rate: 1.1888
• Pound to Dollar exchange rate: 1.2954
• Euro to Dollar exchange rate: 1.0898

TD Securities - one of the world's largest full-service investment banks - have released their latest set of forecasts in which they set out their vision for the foreign exchange market over the next two years.

Analysts say they see Pound Sterling benefiting from political risk where once it was undermined by the same forces.

The Euro should make an emphatic recovery while the Dollar should continue weakening, especially in 2018. 

The commodity currencies - AUD, NZD and CAD - should ultimately be undermined as they see their yield advantage steadily erodes as central banks start raising interest rates. 

GBP Outlook

From being wholly negative for the Pound following the EU referendum, political risks have turned positive in the run up to Theresa May’s snap election as it looks like she will increase her parliamentary majority and therefore secure a better Brexit deal (or so the thinking goes).

Unfortunately, it is rare that all the dials are pointing in the same direction and the UK economy appears to be slowing, a factor which will weigh on the Pound, but overall, especially longer-term, TD are positive.  

GBP/USD to reach 1.27 by end of 2017 but to strengthen substantially to 1.40 by end of 2018.

EUR Outlook

With political risk receding and economic fundamentals improving the Euro benefits from a positive outlook as long as inflation does fall behind.

There is even a risk of the Euro outrunning its fundamentals to the upside, especially versus USD in H2.

EUR/USD is expected to rise steadily to 1.12 by the end of 2017 and 1.20 by the end of 2018.

USD Outlook

The Dollar is not expected to undertake another big rally, according to TD, due to the rest of the world’s central bank’s ‘catching up’ by raising their interest rates.

The Dollar Index (DXY) if forecast to fall to 97.00 by Q4 2017 and 90.00 at the end of 2018.

This weakness will be felt in the big Dollar pairs such as USD/JPY, EUR/USD and GBP/USD.

CAD Outlook

Steadily improving economic fundamentals and osmosis from US growth are likely to support CAD which is middle-ranked.

“We think USD/CAD is in a gradual topping process,” say TD, “but we see greater strategic value in EUR/CAD topside as markets look ahead for an ECB pivot towards less accommodation.”

USD/CAD is forecast to top out and fall to, first 1.32 at the end of this year and then 1.27 at the end of 2018.

AUD Outlook

If the Fed hikes two more times and the Reserve Bank of Australia (RBA) keeps rates unchanged  - as seems likely both will have the same interest rate and long gone will be the days when the Aussie was the high yielding go-to asset for global investors.

In such a scenario, expect to see falls from AUD, reflected in TD’s forecast for AUD/USD to finish the year at 0.74, although the weakening Dollar will lead to a rise to 0.78 in 2018.

NZD Outlook

NZD has a similar outlook to AUD as both the RBA and the Reserve Bank of New Zealand (RBNZ) are expected to keep rates unchanged, and in the case of RBNZ for up to two years.

The loss of yield advantage to the Kiwi because of NZ’s unchanged interest rate and the possibility that US rates could even overtake them, will pile the pressure on the currency, which is likely to weaken.

NZD/USD is forecast to fall to 0.66 by the end of 2017 and then to remain at that level for most of 2018.

JPY Outlook

The Yen is normally ‘undone’ by huge portfolio outflows at this time of year, as Japanese investors look abroad for opportunities.

However, the effect is likely to be lessened significantly this year due to lack of appetite for foreign assets, due to regulatory changes, PnL ‘bleed’ and “repatriation/risk sentiment risk.”

USD/JPY upside may, therefore, be limited and TD forecast 110.00 by year end, falling to 100.00 by end of 2018.