Danske Bank’s Exchange Rate Forecasts Show Decent Sterling Recovery Ahead

The US dollar is forecast to subside against both the pound and euro over coming months according to the latest forecasts issued by Denmark’s Danske Bank.

Meanwhile, the pound should also recover lost ground against the euro with Danske noting the GBP has deviated notably away from what could be considered to be fair value for GBP/EUR.

Danske, well regarded for their currency forecast track-record, note that money markets are not pricing enough an aggressive interest rate raising cycle at the Federal Reserve over the course of the next year to justify a stronger dollar.

The views on the US Fed’s intentions come following the release of a poor set of labour market figures in the May Employment Situation, released on June 3rd.

Fed funds futures have used the weak employment report as an opportunity to push the first rate hike all the way out from July to December.

With the prospect of higher returns coming out of the US turning more remote, global investors have sold dollars.

“What is important is not only the next Fed rate hike but what will happen afterwards. The market is still only pricing in slightly more than two hikes by end-2017 and around three hikes by-end 2018. This can only be seen as the market pricing in a significant probability of a US recession in 12-18 months’ time – too high a probability in our view,” say Danske.

Short-term, Danske believe the EUR/USD could head higher, up towards the 1.14-1.15 area as the Fed is repriced, while the high from 5 May at 1.1616 should hold. We still look for some USD strength into a likely Fed rate hike in September.

Danske are officially holding a 0.76 EUR/GBP forecast for September 2016, 0.74 for the year-end and 0.75 for June 2017.

In GBP to EUR terms this equates to 1.3158, 1.3514 and 1.3333.

The GBP to USD exchange rate is forecast to rise to 1.47 in September 2016, 1.54 by the turn of the year and 1.57 by June 2017.

With regards to the EUR/USD outlook, don’t expect any fireworks in this market. Rather, look for a gradual strengthening of the euro.

1.12 is pencilled in for September, 1.14 for December and 1.18 will be achieved by June 2017.