Euro-Dollar Can Hit 1.11 Before A Dour 2024 Kicks In: Danske Bank

Economic

Forex

Summary:

Danske Bank predicts a Euro to Dollar exchange rate rise to 1.11 before a multi-month decline, reflecting positive market sentiment on easing global inflation. Chief Analyst Stefan Mellin suggests buying on near-term dips, expecting short-term USD weakness. Danske Bank maintains a strategic bearish stance, forecasting declines to 1.10 in three months, 1.07 in six months, and 1.05 in twelve months. This differs from the consensus anticipating gradual USD weakening in 2024, highlighting the complexities in currency forecasts.

In a forward-looking analysis, Danske Bank, one of Scandinavia's leading financial institutions, has provided insights into the potential trajectory of the Euro to Dollar exchange rate. According to Danske Bank, there is a likelihood of the exchange rate experiencing an ascent to 1.11 before undergoing a multi-month decline.

This forecast aligns with the prevailing sentiment in global financial markets, which is characterized by improved investor confidence. This positive sentiment tends to benefit both the Euro and the Dollar, driven by the growing belief that global inflation will recede further. This, in turn, is expected to provide central banks with the flexibility to lower interest rates in the coming months.

Stefan Mellin, Chief Analyst for FX Strategy at Danske Bank, advises market participants to consider buying on near-term dips. He points to the potential for USD weakness in the short term, citing the significant easing of financial conditions over the past month and the bearish USD year-end seasonality.

Danske Bank's latest forecast anticipates the Euro-Dollar exchange rate reaching 1.11 within a one-month horizon. Mellin, however, cautions that European investors might still incur costs to hedge their USD FX exposure in the coming year. Despite a decreasing cost, the expense may see further reductions if the Federal Reserve implements policy rate cuts.

Looking beyond the immediate future, Mellin contends that EUR/USD might face downward pressure, presenting attractive short-entry points. He cites various factors contributing to this potential drop, including relative productivity, energy terms of trade, and fiscal sustainability. Even if carry levels remain stable or decrease in the upcoming year, these factors could influence a decline in EUR/USD.

Danske Bank adopts a strategic bearish stance on EUR/USD, forecasting a decline to 1.10 in three months, 1.07 in six months, and 1.05 in twelve months. This projection sets Danske Bank apart from the consensus view, which anticipates a gradual weakening of the dollar throughout 2024, leading to a strengthening of Euro-dollar conversion rates.

The strategic bearish outlook of Danske Bank underscores the complexities and uncertainties surrounding currency forecasts, as analysts weigh various economic factors and global dynamics. Investors and market participants will closely monitor these developments to make informed decisions in navigating the ever-changing landscape of the foreign exchange market.

Source: PoundSterlingLive

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Warren Takunda

Economic

Bank of England rate cut bets have surged in the wake of December's inflation release that showed price pressures were easing rapidly in the UK and could fall to the 2.0% target in a matter of months.

The fall in headline CPI inflation to 3.9% year-on-year in October was met with a frenzy of bets on money markets that showed investors now see the first Bank of England rate cut falling in May of 2024.

"We continue to expect the MPC to reduce Bank Rate by 25bp initially in May, and then at alternate meetings thereafter," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

The scale of the undershoot in all elements of the inflation data caught markets and economists off guard, with the all-important core CPI rate printing at -0.3% month-on-month, which was well below October's 0.3% and the expected 0.2%.

Reacting to the inflation surprise, the overnight index swaps (OIS) market showed investors added to rate cut bets for 2024 and 2025:

Bank of England Rate Cut Bets Surge As Inflation Could Hit 2.0% Target Within Months_1

Above: Rate cut expectations have increased significantly today. Chart updated 09:14 GMT, 20/12/23. Source: Refinitiv. Courtesy of @Capital Edge

The OIS market implies investors are now looking for roughly five cuts in 2024, with the bank rate falling from 5.25% to around 4.0%, followed by four more cuts in 2025 to a year-end rate of c3.0%.

As the chart above shows, this is materially more than was expected just days ago.

The repricing lower in interest rate expectations has boosted UK bond prices, which has corresponded with falling bond yields, which has weighed on the Pound. "With more rate cuts priced in, GBP, to no surprise, is falling," says Thanim Islam, Head of FX Analysis at Equals Money.

Looking ahead, CPI inflation looks set to continue to fall more quickly than the Bank of England predicted in November. Pantheon Macroeconomics says the headline rate of CPI inflation will drop to about 3.8% in Q1 and then to 2.0% in Q2, substantially below the MPC’s forecasts of 4.4% and 3.6%, respectively.

"This will support a sooner and swifter reduction in Bank Rate than the MPC has countenanced to date, though we still think uncertainty over the scope of fiscal loosening in the Budget and the impact of next April’s increase in the National Living Wage on overall wages will mean that the MPC will not cut Bank Rate at its next meeting in early February," says Pantheon's Tombs.

Despite the fall in inflation, some economists warn market expectations for the timing of the first rate cut in May, as well as the total for 2024, are excessive.

"We expect the Bank of England to face more intensive debate about when it can cut interest rates, but to try and push against this whilst it waits for reassurance that the inflation battle really has been won," says Victoria Clarke, UK Chief Economist at Santander CIB.

Santander says the Bank of England will only gain the comfort it needs to start cutting interest rates in summer 2024, implying rate cut expectations must reverse at some point.

Clarke says although inflation is set to trend lower from here, "the trickier problem for the Bank of England is that services inflation is still elevated, and pay growth too, making it difficult for the BoE to conclude inflation will stay at low rates."

Source: PoundSterlingLive

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Warren Takunda

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Central Bank

Forex

The British pound fell as an initial reaction to news inflation in the UK slowed by a far greater rate in November than had been expected.

The Pound to Euro exchange rate dropped 0.40% to 1.1545 after the ONS said inflation fell by 0.2% month-on-month in November, down from 0% in October and lower than the 0.2% increase the market expected.

CPI inflation printed at 3.9% year-on-year in November, down from 4.6% in October, whereas the market anticipated a reading of 4.3%.

The Pound to Dollar exchange rate fell 0.38% to 1.2660 (below chart) as investors bet there was now enough progress in inflation to allow the Bank of England to become more comfortable with the idea of cutting interest rates in 2024. "This really pushes back on the idea that UK inflation is stickier than elsewhere (it really isn't). BoE cuts in May 2024 live," says Viraj Patel, a strategist at Vanda Research.

Pound Sterling: Significant Drop In Inflation Prompts Falls Against Euro and Dollar_1

Indeed, the services inflation level, which the Bank of England is particularly watchful of, eased from 6.6% y/y to 6.3% in November.

Core inflation, another area of interest for the Bank as it strips out energy and food and gives a better reflection of domestic inflation pressures, rose 5.1 y/y, down from 5.7% and below the expectation of 5.5%. To put this downside surprise into context, the lowest estimate out of 28 economists surveyed by Bloomberg was 5.2%.

The outcome resulted from an unexpected -0.3% m/m reading in November, down from 0.3% in October and below the consensus for 0.2%.

While the Pound has taken a near-term hit, the fall in inflation is all the better for UK consumers and bolsters the UK's economic outlook. In the medium term, this should be a supportive development for Pound Sterling.

Pound Sterling: Significant Drop In Inflation Prompts Falls Against Euro and Dollar_2

Jake Finney, economist at PwC, says the decline in inflation provides strong evidence that disinflationary pressures are building in the UK.

"Headline, core and services inflation are all now materially below the Bank of England’s expectations in their last November Monetary Policy Report. Next month's inflation data is likely to follow a similar trend," he says. Economists still expect headline inflation to increase slightly early in the new year as the CPI basket is re-weighted and the household energy price cap is increased by 5%.

Reacting to the positive inflation surprise, the overnight index swaps (OIS) market showed investors added to rate cut bets for 2024 and 2025.

The OIS market implies investors are now looking for roughly five cuts in 2024, with the bank rate falling from 5.25% to around 4.0%, followed by four more cuts in 2025 to a year-end rate of c3.0%.

"Following the big downward shift in BoE rate expectations in recent months, the OIS market is now roughly in line with our own year-end calls for 2024 and 2025 which we have held since June," says Kallum Pickering, Senior Economist at Berenberg.

"Although Bank of England (BoE) policymakers are at pains to push back against growing rate cut bets for 2024 while inflation is still well above target, the direction of travel for prices now seems clear," he adds.

Source: PoundSterlingLive

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Chandan Gupta

The Nasdaq 100 initially rallied during Wednesday trading awaiting the Federal Reserve's announcement. That said, I think there is a situation in this market where no matter what happens in the future, buyers are going to come back and try to take over. With this in mind, I think he needs to pay close attention to the 50-day EMA, especially the level around 15,500.

Of course, this assumes that you can access this area. After all, this is a very bullish brand, and there's still a lot of noise that could be positive for it. Finally there's the "Santa Claus Rally" and Wall Street will obviously have a lot to say about its potential upside.

A short-term pullback could bring upside potential, with short-term support below the 16,000 level. Below this, the 15,750 level will also be supported.

In general, I think this is a situation where people continue to try to pursue performance, but it's a little overwhelming at the moment.

All things being equal, I believe we will continue rising through the end of the year, but the real question is whether we need to retreat to find support. I think it's very likely that this will happen at some point, especially with the Federal Reserve statement coming out later on Wednesday, and it would certainly cause quite a ripple.

In general, I think people will continue to rely on situations like this, if for no other reason than to demonstrate to their customers that they own all the appropriate stocks. So I think this is the situation where they are taking these actions.

Additionally, it should be kept in mind that the 'Magnificent 7' continues to lead this pair, so while the market may continue to see significant volatility, buyers should look to buy this pair until the new year.

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Devin

Economic

Red Sea Chaos Risks Driving Up Price of Goods for Global Economy_1

Attacks in the Red Sea linked to the Israel-Hamas war will cause shipping delays and drive up the price of goods, bringing a new inflation risk to the economy.

Shipping companies are diverting cargoes after Iran-backed Houthi militants attacked commercial vessels plying the Red Sea. The vessels will have to sail around Africa instead of taking the shorter route through the Suez Canal.

This rerouting will mean higher shipping costs and longer delivery time, Bloomberg Economics analysts including Gerard DiPippo wrote in a note. The Red Sea is one of the world's most important shipping lanes, carrying about 14% of global maritime trade. Among the economies most affected by the trade disruptions would be Greece, Jordan, Sri Lanka and Bulgaria, the analysts said.

More than 20% of containers passing through the Suez Canal carry goods from Asia to European and Mediterranean nations, according to logistics intelligence firm project44. Diverted ships would have to sail around Africa to reach Europe, adding a minimum of seven to 10 days to the journey, they estimated.

Still, there are reasons to believe the disruptions will have only a moderate economic impact, Bloomberg Economics said.

While the cost to send a 40-foot container from Shanghai to Rotterdam has jumped 44% from the end of October before the attacks began, and by more than 26% to Genoa, they remain well below levels in 2021 and 2022 during the pandemic, data compiled by Bloomberg show.

The effect on inflation in Europe will be limited as markets and shipping companies adjust to the new situation, according to Bloomberg Economics.

Chinese exports have also been weak all year and could slow next month, as factories typically wind down early in the year due to the end of Christmas demand and before the Lunar New Year break in Asia. However if the disruptions continue or worsen, it could put more downward pressure on that trade.

Exports from China to Europe fell in each month since June, while export growth from Japan to Western Europe slowed to 1.1% in November from a year earlier.

The US has announced a new task force intended to protect commercial vessels traveling through the Red Sea. Countries participating include the UK, Bahrain, Canada, France and Italy. Both Japan and China have military bases in Djibouti, near the Red Sea, but have not said they would take part in the naval effort.

“The best the world can hope for may be a moderate risk scenario, in which shipping is diverted for at least several months until the security situation in the Red Sea stabilizes,” the Bloomberg Economics analysts wrote.

This may not be the optimal scenario but it's happening when there's more shipping capacity and it's better than some of the alternatives, they added

Source: Bloomberg

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ING

Economic

Central Bank

UK inflation has dipped below 4%, and that's a huge surprise compared to what had been expected. What's more, the fall in headline CPI to 3.9% (from 4.6%) seems to be fairly broad-based at first glance. We're seeing discounting across the board on consumer goods, from clothing to household goods, and cars. Lower fuel and food contributions helped too.

But the Bank of England will be particularly comforted by the further surprise fall in services inflation, which came down to 6.3%, having peaked at 7.4% over the summer. Admittedly the Bank had argued, as recently as last week, that this downtrend isn't entirely linked to economic factors – the implication being that some of the move is just statistical noise. The Bank could still level that argument at this latest data, with some of the downside surprise linked to a fall in communications prices (ie internet/phone contracts etc) as well as volatile airfares. But we are also seeing more muted price pressures across areas like hospitality and holidays, which are what we'd more traditionally think of as services.

Surprise UK Inflation Slide Bolsters Chances of Summer Rate Cut_1

So what next? Despite today's positive surprise, we think services inflation could stay sticky in the 6% region into early next year. At face value, that would justify the Bank of England's more cautious approach at last week's meeting. The BoE took a decidedly different line to the Federal Reserve, offering implicit pushback against the quantity of rate cuts priced into financial markets in 2024. Expect officials to keep up that cautious narrative as we enter the new year.

But by the spring, we think the story is likely to begin to change. Areas like hospitality services should continue to experience disinflation. A combination of a further (gradual) slowdown in wage growth and the lagged impact of lower gas prices should help. Services inflation at 4% next summer seems feasible.

If the recent trends in consumer goods categories continue too, then there's a decent chance that headline inflation gets back to the 2% target as soon as May and potentially even dips below, particularly if petrol prices continue to fall (not our base case).

Further downward pressure on food inflation will also be a key driver here. The month-on-month increases in food prices have already slowed considerably since late 2022/early 2023, and there's a reasonable chance we start to see consistent price falls on the back of steadily decreasing producer prices.

Surprise UK Inflation Slide Bolsters Chances of Summer Rate Cut_2

Put that all together, and we think markets are right to be pricing a number of rate cuts for 2024. Investors now expect 140bp of cuts in 2024 after this latest downside surprise on inflation, starting in May. That's maybe pushing it, and we still think the Bank will prefer to tread a little more cautiously with 100bp of cuts starting in August.

But interestingly, this data has also seen investors reassess where the BoE stands relative to the Fed and European Central Bank. Up until now, markets had been expecting both of the latter to be much more aggressive than the BoE, but that narrative seems to be fading.

One thing we've often heard recently is that UK inflation (specifically services) is stickier and therefore that implies slower/later rate cuts relative to the eurozone. We wrote in more detail recently why a lot of the divergence in UK services inflation relative to the continent can be explained by factors not intrinsically linked to economic conditions. In the areas that really count for monetary policy – things like hospitality – the differences are much less dramatic. So while the BoE might be a little later to the cutting game than other European economies, we don't expect the UK to be an outlier when it comes to the extent of policy easing.

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Warren Takunda

Economic

Forex

The New Zealand Dollar is set to embark on a recovery against the U.S. Dollar in 2024 according to research from one of New Zealand's biggest financial institutions.

ANZ Bank says NZD has room to rise in 2024, "but not without volatility", particularly given some uncertainty surrounding the Reserve Bank of New Zealand's next moves on interest rates.

Nevertheless, the bigger picture is one that is supportive of the risk-sensitive Kiwi Dollar.

"A global return of risk appetite and the NZD’s high carry advantage will drive the upside we expect into 2024," says ANZ in a year-ahead outlook note.

"A positive cyclical outlook bodes well for high beta currencies like NZD," it adds.

The New Zealand Dollar has been one of the better-performing major currencies heading into year-end, courtesy of the improved investor sentiment linked to growing expectations that the Federal Reserve will be able to cut interest rates in the coming months.

According to ANZ, this recent outperformance can extend against the U.S. Dollar over the coming months.

However, the Pound is tipped to defy NZ dollar strength as it will also advance against the U.S. currency and frustrate expectations for a dip back below 2.0 in GBP/NZD.

"Though the growth outlook remains challenging, recent data suggest the economy may be turning a corner," says ANZ on the UK economic outlook. As a result, analysts say the Pound, "is not to be underestimated".

Question marks over the path adopted by the NZD hang over whether or not the RBNZ will raise interest rates again.

Market pricing shows investors are not fully positioned for another move, but data due for release ahead of the February decision could yet sway the central bank into action.

Currency analysts warn that a rate rise will likely lead to a selloff in the NZD/USD, as we have seen after previous hikes. "The prospect that further tightening could heighten the risk of a recession will weigh on the currency."

All considered, ANZ's New Zealand to U.S. Dollar forecast for the end of March 2024 is 0.62, 0.62 by end-June, 0.63 by end-September and 0.63 by year-end. The exchange rate is currently at 0.6258.

ANZ's Pound-Dollar forecast profile reflects an expectation that the UK economy has turned a corner, with 1.30, 1.32, 1.33 and 1.34 pencilled in for the aforementioned time points.

This translates into a Pound to New Zealand Dollar forecast profile of 2.10, 2.13, 2.10 and 2.13.