Barclays Forecast Update: GBP Downgraded, USD Headed Down but Not Out, EUR on the Blink

Modified: Monday, 01 July 2019 18:51 BST
Written by: James Skinner

- GBP forecasts downgraded as Brexit saga drags on into year-end.

- USD seen moving lower into year-end but recovery forecast in 2020.

- EUR downgraded for 2019, seen on the slide to new lows in 2020.

The Pound is likely to remain depressed into year-end and beyond according to the latest forecasts from Barclays, while both the Dollar and Euro are set to face trials and tribulations of their own before the curtain closes on 2019.

Currency markets entered the second half of the year in a state of flux Monday, with a lot about the future outlook likely to be determined by central bank policy meetings set to take place through the summer months, beginning with the Federal Reserve in just a few weeks time.

Until recently the U.S. Dollar had been the biggest draw for investors in the currency markets after the Federal Reserve raised its interest rate on four occasions in 2019, taking it up to a post-crisis high of 2.5% and drawing capital flows away from other G10 units.

However, the statistical hangover from President Donald Trump's tax cuts of last year as well as adverse impact upon manufacturers from the trade war with China are widely expected to see the U.S. economy slow in 2019, leading the Fed to call an end to the Dollar rate by cutting its interest rate.

As a result the market entered 2019 with consensus looking for a broad Dollar decline and barely six months in, the Fed duly signalled it could soon begin to reduce U.S. borrowing costs in order to sustain a waning economic expansion.

Barclays' currency strategists have tipped their hat to this idea in their latest forecast book but are still swimming against the tide of consensus opinion with some of their projections. The bank did not buy into the idea of Fed cuts and a Dollar decline at the beginning of the year.

Above: Barclays interest rate forecasts for G10 central banks.

The London-headquartered lender has now slashed its forecasts for U.S. interest rates over the coming quarters and downgraded a range of its Dollar projections too, which has implications for many of the other exchange rates.

However, and in what is still a contrarian call, the bank is looking for the Dollar downturn to prove short-lived because it sees weakness in other parts of the global economy likely auguring continued weakness for other currencies even in the face of a retreating Federal Reserve. As a result, the bank forecasts a Dollar recovery in 2020.

Meanwhile, the Pound is expected to suffer from a combination of ongoing uncertainty over the exact shape of the UK's eventual exit from the European Union as well as from a resurgent Dollar once into 2020. And the Euro is seen facing a fresh round of European Central Bank (ECB) interest rate cuts that hurt the single currency.

Below is a selection of views from the Barclays team outlining what all of this could mean for individual exchange rates next year.

The Dollar index was quoted 0.52% higher at 96.80 Monday and is now up 0.81% for 2019 year overall. The Pound was 0.28% lower at 1.2642 against the Dollar and is down 0.77% in 2019, while the Euro-to-Dollar rate was down 0.67% at 1.1290 and is down -1.5% this year.

Above: Barclays exchange rate forecasts.

Pound Sterling

"We are turning increasingly more bearish on the GBP because Brexit-induced political and business uncertainty is likely to cap any upside for the pound. EURGBP will likely further appreciate over the coming quarter as markets re-assess the risks associated with a no-deal Brexit. While we still envision a deal by year-end, our conviction is generally low."

"The domestic economy is already slowing, as is the previously resilient UK labour market, a view already shared by some MPC members. Moreover, the weak global backdrop is unlikely to provide much support to the pound either and is making the MPC’s current stance hard to justify."

"Risks to our GBP forecasts skew to the downside and can materialize either from a realisation of a no-deal Brexit or further delays in the process, with associated increased uncertainty related to an early election or second referendum."

Above: Barclays Pound Sterling forecasts.

U.S. Dollar

"We expect the Fed’s pre-emptive cuts to temporarily weigh on the USD, especially vs. G10 currencies, as the US rates advantage compresses amid an environment of slowing global growth. However, the Fed’s ability to support an extended US expansion stands in contrast to clear sustained slowing – and rising risks – in China and Europe, implying a USD rebound in 2020. We expect the USD to be better supported vs. EM currencies, due to the broadening global slowdown, trading tensions and downside risks to commodity prices."

Above Barclays U.S. Dollar Forecasts.

Euro

"We see scope for further, limited EUR gains, consistent with our analysis of USD performance during Fed cutting cycles. Looking ahead, the outlook for the single currency remains bleak."

"In our view, the Fed has more degrees of freedom and will likely succeed in stimulating the US economy next year. In contrast, while more ECB easing is likely on its way, we doubt it will have a meaningful impact on growth."

"We expect only a shallow and short-lived EUR rally in Q3 and broad depreciation thereafter, with EURUSD breaking 1.10 and re-testing previous cycle lows over our forecast horizon. A constrained ECB, decelerating EA growth and the bloc’s high vulnerability to escalating US-China trade tensions are the primary drivers of our bearish EUR view."

"Possible US tariffs on EU autos, a no-deal Brexit and fiscal sustainability concerns related to Italy, skew the risks of our forecasts to the downside."

Above: Barclays Euro forecast.

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Australian Dollar

"The expected intensification of US-China trade tensions implies front-loaded negative implications for Australia and we revise our AUDUSD forecasts lower to 0.6775 in Q3 and 0.6725-year end from 69 cents for both quarters previously. We pencil in further weakness in AUD in 2020, forecasting new decade lows."

"We expect the support from high terms of trade to moderate, offsetting any tailwinds from narrowing rate differentials versus the US. AUD demand should reduce as the trade balance declines (from historic highs) via both lower commodity prices and global demand. A likely deterioration in investor sentiment and rates at all-time lows should see greater risk premia demanded by global investors who are needed to fund structural current account deficits."

"AUD is not cheap; it remains around its long-term real effective exchange rate average."

Above Barclays Australian Dollar Forecasts.

New Zealand Dollar

"The likely weakening in global growth and trade carries negative implications for New Zealand and we revise our NZDUSD forecasts marginally lower to 0.65 in Q3 and 0.64-year end from 65 cents for both quarters previously. "

"We expect the weakness to extend further in 2020 and forecast relative underperformance against the AUD. NZD demand should reduce as the trade balance declines and weaker sentiment prompts investors to assign greater risk premia to fund structural current account deficits."

"NZD is not cheap, it remains slightly above its long-term real effective exchange rate average, and currency depreciation is an effective way to quickly establish necessary discount for these investors."

Above: Barclays New Zealand Dollar forecasts.

Canadian Dollar

"We expect the loonie to be range bound versus USD in the near-term, and gradually weaken in Q3-Q4 19 as escalating US-China trade tensions threaten global trade and growth, bringing downside risks to Canadian domestic activity."

"Oil prices have corrected sharply over Q2 19 and, although we expect prices to remain relatively stable, weaker demand expectations imply downside risks to our oil price forecasts for H2 19. Rising oil inventories in Alberta and potential oil-quality spread widening could deepen the discount for the WCS relative to WTI, weighing on the loonie."

"We see limited potential for the interest rate differential with the US to extend its recent narrowing because the market is already fully pricing in three rate cuts by the Fed this year and we expect that the easing cycle will be of precautionary nature, with the US economy still outperforming other regions...However, we believe CAD will outperform other G10 commodity currencies that are more exposed to China and the trade conflict, and thus stand to gain less from the Fed’s efforts."

"Finally, domestic politics could begin to weigh on CAD in Q3 if the Conservative party remains competitive and runs on a platform of fiscal consolidation, while uncertainty surrounding the final ratification of the USMCA in the US Congress remains and could come into focus in the next few weeks."

Above: Barclays Canadian Dollar forecasts.

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