Danske Bank Exchange Rate Forecasts at the Start of 2018

Pound Sterling is set to edge higher against the Euro in 2018 who warn EUR/GBP could break "considerably lower". 

Following a year that was fraught with political and economic risks to currency markets, and dominated by central bank action, analysts at Scandanavian heavyweight Danske Bank are updating their FX forecasts at the start of 2018.

Albeit predictably, Brexit remains the dominant driver behind the wheel of the UK economy and currency, while the Bank of England is seen taking a back seat.

Notably, however, there may be scope for Sterling to recover against the Euro throughout 2018 as clarity around the eventual shape and implications of Brexit emerges. This could spare the Pound-to-Euro rate from falls like those that it saw in the first six months of 2017.

“While uncertainty and fundamentals justify an undervalued GBP for now, we see prospects of a recovery in 2018 as clarification on Brexit increases. This should eventually bring investors back to GBP assets due to attractive valuations,” writes Morten Helt, Danske Bank’s EUR/GBP analyst.

Meanwhile, the Euro is set to continue to its march northward as years of extreme undervaluation reverse while a return of international investors to the continent also helps to boost the currency.

The US Dollar, on the other hand, is likely to struggle to draw a boost from the implementation of tax reforms and is notably absent from any major forecast changes.

Commodity bloc currencies such as the Australian Dollar, Canadian Dollar and New Zealand Dollar, will trade in accordance with the messages put out by their central banks.

The only one of these three likely to see wild swings is the Canadian Dollar, which has risen sharply in response to markets betting on a faster pace of interest rate rises than the Bank of Canada is likely to deliver.

EUR/GBP Forecast

“We still expect EUR/GBP to trade within the 0.8650- 0.90 range in the coming months targeting 0.88 in 1-3M.”

[This equates to a 1.1000 - 1.1560 range for the Pound-to-Euro rate and a three month target of 1.1360.]

"We target 0.87 in 6M and 0.86 in 12M, but stress risks are that a break lower in the cross could come sooner than our forecast indicates, and that the cross might break considerably lower."

“The Brexit issue is set to remain the main driver for GBP in 2018 and while uncertainty and fundamentals justify an undervalued GBP for now, we still see potential for a decline in EUR/GBP driven by possible clarification on Brexit negotiations and valuations. What matters for GBP is the future EU-UK relationship and, not least, reassurance that it can avoid a ‘cliff-edge Brexit’.”

“We forecast growth of 1.3% in 2018 and 1.2% in 2019 but stress that uncertainty surrounding our forecast is higher than usual due to Brexit.”

“We expect the Bank of England (BoE) to keep interest rates unchanged for the next 12M in a scenario with moderate GBP appreciation.”

“The market is currently pricing in the next 25bp hike in December 2018, which is too early, in our view – unless the GBP weakens considerably. However, we expect the market’s pricing to remain intact in the coming months. Hence, UK interest rates are not likely to be a drag on the GBP near term.”

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EUR/USD Forecast

“We see EUR/USD at 1.20 in 1M and in 3M (previously 1.16), 1.23 in 6M (1.20), and 1.28 in 12M (previously 1.25).”

“Two balance-of-payments (BoP) factors are often – separately – cited as key for the euro: the long-standing eurozone current-account balance, and the eurozone capital outflows seen in recent years. Combining these with FDI into a broad basic BoP (BBoP) arguably captures the commercial supply/demand for a given currency.”

“The eurozone BBoP moved adversely mid-2014 to late 2016 but has been trending upwards since due to the current-account surplus and a drop in outflows deriving from portfolio (notably equity) and direct investment alike. For the US, the BBoP shows little overall direction, and has notably tracked USD much worse than is the case for EUR.”

“The US tax reform should widen the current account deficit, but, at the same time, the US will need to sell more Treasuries to finance a larger fiscal deficit; this leaves the outlook for BBoP a bit blurred. In contrast, we expect the eurozone to see the BBoP continue to move in its favour, as notably the allure of eurozone debt securities rises again.”

“We emphasise that the potential for relative rates, valuation and flows to support the cross alike remains in place.”

“But, in our view, the market interpretation of the latest ECB communication is not entirely ‘fair’ and we expect a softer tone at the January ECB meeting alongside the risk of a near-term Fed hike to weigh on the cross somewhat.”

“However, we no longer expect a sustained dip below 1.20 and have upped our forecast profile, partly reflecting the roll of an upward-sloping trend profile in the cross, and partly reflecting recent evidence of the sensitivity of the EUR to ECB rhetoric.”

USD/JPY Forecast

“In the near term, US yields and risk sentiment are likely to remain the key drivers for the cross. However, we expect BoJ QE exit concerns and uncertainty about the future BoJ leadership to weigh on USD/JPY, and we have thus lowered our 1M forecast to 112 (previously 113).”

“Over the medium term, we still see USD/JPY trading mostly sideways within the 111-114.50 range, targeting 113 in 3M. While a continuation of the global recovery and suppressed risk premiums are expected to be JPY negative and as we still expect Fed-BoJ divergence to support USD/JPY, we see little potential for a substantial move higher over the medium term.”

“We target 114 in 6- 12M, with risks increasingly skewed to the downside amid stretched short JPY positioning, further flattening pressure on the US yield curve and a weaker growth outlook in China.”

AUD, NZD and the CAD

"On the surface, global growth is supportive for commodity currencies but we emphasise that the outlook suggesting China – the world’s largest commodity consumer – will slow down should act as a headwind."

"Meanwhile, we think some of the weakness is already priced in, suggesting the outlook seems brighter in the months to come despite modest USD strength."

"On the central banks, we expect two Bank of Canada (BoC) rate hikes over the coming 12 months and one each from the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ)."

"For RBA and RBNZ, this is in line with market pricing, while markets price in an additional hike for the BoC. Fundamentally, the AUD and NZD seem to us overvalued, while the CAD is close to its fair value."

"We now forecast AUD/USD at 0.78 in 1M (previously 0.76), 0.76 in 3M (was 0.75), 0.78 in 6M (was 0.77) and 0.79 in 12M (was 0.78)"

"NZD/USD at 0.72 in 1M (was 0.69), 0.70 in 3M (was 0.69), 0.71 in 6M (was 0.70) and 0.73 in 12M (was 0.72).

Finally, we forecast USD/CAD at 1.26 in 1M (was 1.29), 1.27 in 3M (was 1.28), 1.25 in 6M (unchanged) and 1.23 in 12M (unchanged)."

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