ING Group Forecast Update: GBP Misses the USD Turn after Downgrades, EUR Limited by Easy ECB
- Written by: James Skinner
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- GBP forecasts downgraded amid mounting election risks.
- USD is facing a big turn lower before the 2019 year is out.
- EUR at risk from fresh ECB easing, possibly in September.
The Pound is facing a protracted period of weakness as the risk of a general election and socialist government mounts, according to new forecasts from ING Group, while the Dollar is just months away from a turn lower that brings its 18-month rally to an end although the Euro could fail to capitalise on this.
Sterling has been buffeted in recent weeks by a volatile domestic political climate that is now seen making another general election all-but inevitable. This is a problem for investors because it would risk installing a Marxist opposition leader, who has a profligate nationalisation agenda, in 10 Downing Street.
Now, forecasts for Sterling have been downgraded ahead of what could be a testing winter period for the British currency. This comes as markets sit at an inflection point, with Federal Reserve (Fed) interest rate policy and the outlook for the Dollar both being central to what happens next, according to ING.
"The dramatic decline in US rates over the last month has taken some of the shine off the dollar. Our team now looks for Fed rate cuts in Sep and Dec, though this should be an insurance move rather than the start of a major easing cycle," says Chris Turner, head of FX strategy at ING.
The greenback has long been expected to ease from its 2018 highs although that moment is now drawing closer, ING says. The Dollar has whipsawed within a narrow range lately as markets bet the Fed will cut interest rates as many as three times in the second half of the year.
Those rate cuts, if they're forthcoming, are expected to bring an end to the 18-month Dollar rally that has crushed nearly all other G10 currencies since early 2018. However, not all G10 currencies are expected to participate in the subsequent recovery, as both Sterling and the Euro are seen being left behind.
"We doubt EUR/USD is able to take advantage of the soft dollar environment. The ECB looks very close to easing again – potentially in September with a deposit rate cut and re-starting asset purchases," Turner warns.
Below is a selection of ING's views on what this environment is likely to mean for individual exchange rates.
The Dollar index was 0.03% higher at 97.54 Monday and is now up 1.58% for 2019. The Euro-to-Dollar rate was quoted 0.15% higher at 1.1218 but has now declined by 2.16% for 2019.
The Pound-to-Dollar rate was 0.15% higher at 1.2598 but is now down 1.11% for the year, after having thrown away what was, in February, a 5% gain.
Above: ING Group exchange rate forecasts.
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Pound Sterling
"We expect GBP to stay under pressure in the near term as Tory leadership favourite, Johnson, retains his stance of taking the UK out of the EU on 31 October – with or without a deal. This should be the story at least until he secures the keys to 10 Downing Street when Tory members return their ballots by 22 July."
"Of the array of possibilities thereafter, our team attach the highest probability (35%) to early elections, probably in December. Until the possibility of a socialist government is dismissed, we would expect GBP to stay pressured (low 1.20s)."
"This month we are revising our EUR/GBP profile higher on the back of a poor outlook for GBP. UK politics looks set to become very messy into the October window and the lack of transparency will surely weigh on UK activity and investment."
"A probabilistic assessment (looking at each UK scenario’s probability and its impact on EUR/GBP) suggests EUR/GBP should be trading about 0.91 later this year – although early elections could easily mean that EUR/GBP overshoots to 0.95."
AA
U.S. Dollar
"Now that the global trade war has resonated with the Fed it seems appropriate to start talking about whether the eighteen month dollar rally is over. Our house view of an escalation of the trade conflict over coming quarters – and more importantly at least two cuts from the Fed – suggest USD/JPY has indeed peaked."
"The dramatic decline in US rates over the last month has taken some of the shine off the dollar. Our team now looks for Fed rate cuts in Sep and Dec, though this should be an insurance move rather than the start of a major easing cycle. However, the fact that US trade wars are hitting home – and that we don’t expect a cessation in the conflict until early 20 – has harmed the dollar."
"In an environment of Fed easing during a global trade war we would expect USD/JPY to lead the dollar decline. The BoJ’s ability to intervene and sell JPY looks very limited since Japan is already on US Treasury’s monitoring list and fulfils two of the three criteria for being designated a currency manipulator."
AA
Euro
"We doubt EUR/USD is able to take advantage of the soft dollar environment. The ECB looks very close to easing again – potentially in September with a deposit rate cut and re-starting asset purchases geared more towards corporate debt. Brexit and Italian politics suggest EUR/USD may remain trapped in a 1.10-15 range until year-end."
"Narrowing rate differentials would normally mean a higher EUR/USD. Yet i) we think US rates need to fall another 25-50bp to make differentials relevant again and ii) Europe has its challenges."
"Those European challenges mean that the ECB could cut rates & re-start QE in September – preventing EUR/$ breaking above 1.15."
AA
Australian Dollar
"The deterioration of US-China trade relationships are likely to remain a dampening factor for AUD. However, Chinese government is reportedly planning to fund major infrastructures which could keep demand for Australian commodities sustained. Also, iron ore and coal imports from China recently rebounded."
"Another cut by the RBA is mostly priced in by the end of Q3, while additional easing will likely depend on unemployment failing to move towards the 4.5% target. Nonetheless, the Fed’s easing shift may keep the relative rate spread limited to the downside."
"All in all, we see AUD finding support below 0.68 in Q3 & then to recover as abating trade tensions trigger AUD short-covering."
AA
New Zealand Dollar
"We expect NZD to stay on a depreciating path on the back of concerns that a tariff-driven Chinese economic slowdown may hurt New Zealand agricultural exports."
"The RBNZ assistant governor recently indicated the central bank is in no rush to deliver a second rate cut, that we expect in Q3. However, 25bp of easing are already priced in by year-end and we see little room for another slump in short-term rates."
"While expecting a NZD rebound from Q4, the relatively stronger Australian economic outlook suggests investors may favour AUD longs when positioning for a recovery in trade-related sentiment. In turn, AUD/NZD could approach the 1.090 area by 2Q20."
AA
Canadian Dollar
"The recent BoC upbeat stance on the economy is likely to be supported ahead by a tight labour market, solid household spending and hopes of an imminent ratification of the USMCA."
"Despite a 65% market-implied probability of a cut by the end of 2019 we expect the BoC to keep rates unchanged. Given the prospect of monetary easing by the Fed, the USD-CAD rate differentials should continue to move in favour of the loonie."
"The OPEC+ meeting may be delayed to early July but should still signal an extension of the output cut deal and push WTI above the 60$ level by year-end. Despite gradual unwinding of Alberta production cuts, WCS should follow global crude prices higher."
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