The US economy is viewed as more resilient than its counterparts in Europe and Asia, which are struggling due to geopolitical or pandemic headwinds. The Fed has also emerged as one of the more hawkish G10 central banks, which has helped the USD's appeal in terms of interest rate yields. Finally, Risk-averse investors continue to seek safety in high-yielding USD cash. We predict that the USD will only reach its top in Q123 as long as it continues to be a safe haven currency with a high yield. The inflated US dollar also suggests that any future increases may be slower in pace over the following 3 to 6 months. Further out, depending on the severity of the global downturn, the USD should cede some ground vs G10 FX.
The CAD is still holding up better than its rivals even though it has lost some of its hold against the unrelenting USD. A more significant slowdown in Canadian inflation has increased the likelihood that the BoC will fall short of matching the Fed's increased hawkishness. The CAD may remain weak going into what could wind up being a turbulent year end before Canada's strong fundamentals can solidify a firm rebound.
In the upcoming 3 to 6 months, EUR/USD should remain under pressure. The Eurozone's stagflationary headwinds have been exacerbated by the war in Ukraine, which should also have long-term effects for the region's external position, relative real rates, and terms of trade for commodities. In response to these dangers, the ECB has started to normalise its policies. Its mission is made more difficult by the Eurozone's periphery's vulnerability to declining monetary support. Nevertheless, we believe that the ECB will eventually be able to control increases in Eurozone credit concerns. This should make the EUR a more appealing safe-haven currency going forward and help it gain from the repatriation of capital stored abroad back into the Eurozone. Many negatives seem to be in the priced in and the EUR/USD could ultimately recover in 6M-12M.
For the time being, the GBP can still be a desirable stagflation and risk aversion hedge. The UK economy's recovery is still being hampered by rising energy prices, labour shortages, global supply chain disruptions, and continuing Brexit-related headwinds, which makes it more difficult for the BoE to normalize in the face of uncomfortably high inflation. This might further depress UK real rates and yields and have a short-term negative impact on the GBP. The conflict in Ukraine and the peculiar dangers associated with Brexit might also weaken the UK's economic recovery. Longer term, the undervalued GBP could resume its upward trend with the EUR. A cautious comeback for the pound in H223 could be sparked by rising UK real rates and yields.
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