Saxo: EUR/USD Forecast to Find Parity in 6 Months

Saxo Bank's lead analyst has updated clients with his latest exchange rate forecasts in the wake of the much-publicised market turbulence.

Analyst John Hardy, Head of FX Strategy, says the key assumption for all of these forecasts is that global markets recover from their recent turbulence.

China must also avoid aggressive currency devluation and only lets it down slowly while the Fed is assumed to move forward with its first rate hike amid still strong US data.

Hardy is not particularly concerned with whether the hike comes at the September, October or December FOMC meetings.

The forecast is for 6 months ahead.

USD/JPY: 130+

There could be upside risk to this assessment if the Bank of Japan feels that it can move one more time to ease policy due to the deflationary effects of crashing energy and other commodity prices and the Chinese currency devaluation, but the yen is already quite weak and the cycle is mostly over with for now.

Any downside risk would be due to this market turmoil not easing in the coming months, but instead worsening (not our base case scenario).

GBP/USD: 1.50

The move here is likely to be less dramatic than the move in other major USD pairs because the themes driving the USD and the GBP are similar, but expecting the USD to outperform as the Fed moves to hike rates before the Bank of England.

Latest Pound/Euro Exchange Rates

	Live: 1.1455▲ + 0.1% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1066 - 1.1111
**Independent Specialist	1.1295 - 1.134 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

EUR/USD: 1.00

EURUSD should trade considerably lower if we get over this latest bout of nervousness and get back to focusing on central bank policy divergence and the euro carry trade (borrowing in Euros to finance higher yielding trades elsewhere) that was driving the euro previously.

USD/TRY: 3.10

Ongoing pressure on EM currencies as the Fed moves to normalize policy, though the pressure may ease for Turkey and other EM currencies, relatively speaking, if the market overcomes the recent turbulence and begins rallying again.

USD/CHF: 1.10  

USDCHF should rally strongly if the market gets over the recent hiccup. The Swiss franc is woefully overvalued but the market has been reluctant to touch it after the January 15 abandonment of the CHF ceiling by the Swiss National Bank.

But the recent market turmoil entirely failed to see significant CHF strength, suggesting it has lost its safe haven status and this could embolden sellers, who may also get a helping hand from an intervening Swiss National Bank, who would like to see the currency considerably weaker.

Dollar Higher, Euro and Pound Sterling Lower

Looking at the markets as we head towards the final session of the week we note a sense of normality is returning.

"The euro’s true colours are starting to show again. The euro made a four-cent swoon from this week’s seven-month highs, showing how its recent resilience has had little to do with fundamentals which remain weak in Europe, contrasting the brighter picture in the U.S," says analyst Joe Manimbo at Western Union.

The euro continues to be held hostage to movements in broader markets, like stocks.

When equities tumble, the euro tends to fare its best as risk-averse investors are forced to buy back the low-yielding euro and discard riskier, higher-yielding assets. Market sentiment remains highly fragile, which should keep the euro on a volatile footing.

The pound sterling meanwhile tumbled further away from multi-month highs, hitting its weakest in three weeks against its U.S. counterpart.

The pound is simply a bystander at this point and until we get some solid data to focus minds on the outlook concerning interest rate rises we expect GBP to under-perform.

That said, UK economic fundamentals are solid and it will only be a matter of time before sterling finds demand once more.