Analysts at French banking giant Societe Generale have updated markets with their latest set of foreign exchange forecasts.
The worst may be over for the Pound, further losses are still likely for the Dollar and the Euro will probably lead the field again in 2018, according to the latest round of forecasts from strategists at Societe Generale.
GBP to Continue “Strumming Along the Bottom”
After falling by a high single digit number against the Euro, and posting substantial losses against many of its higher yielding counterparts during the year to date, the worst is probably over for the Pound Sterling.
However, with Brexit negotiations set to dominate the headlines through 2018, uncertainty remains a prominent feature on the 2018 menu and expectations of good economic news are notably absent from the Soc Gen blotter.
“The Sterling forecast can be summed up as ‘bumping along the bottom’ because we see little chance of positive economic surprises but struggle to see how sterling can get even cheaper than it is,” says Kit Juckes, a cross-asset strategist at Societe Generale.
Juckes forecasts the Pound-to-Dollar rate to remain in a range during 2018 while further losses are likely for the Pound-to-Euro rate, given the currency’s strength. favours selling
“Hence, we favour selling the pound against the euro, or better still, the SEK and NOK,” Juckes wrote.
USD Could Bounce Near-Term, but Further Losses Await on the Horizon
Officially the worst-performing G10 currency in 2017 so far, a further fall would make a US Dollar bounce likely in the near term, says Juckes, only this would prove shor- lived as expectations for the US economy have peaked and monetary policies are evolving elsewhere in the world.
“Today, yields are tumbling and the Dollar’s going with them. This feels very much like a clear-out of remaining bearish bond and dollar bullish positions,” writes Juckes. “But after that, the danger is that the US economy merely trundles along and the focus remains firmly on the shifting economic and policy outlook elsewhere.”
Juckes says the Dollar Index has given back 38.2% of the gains it has made since 2011 and has warned that this could become 50% if the European Central Bank continues its slow march toward policy normalisation and, one day, the Bank of Japan looks to begin winding down its own stimulus program.
Euro to Lead the Field among Majors in 2018 as ECB tapers and Others Stay on Hold
The Euro area economy is gathering momentum, with second quarter GDP growth coming in at its fastest pace in six years, while the ECB appears committed to ending the era of extraordinary monetary policy.
This combined with inaction from other central banks around the world could provide the common currency with renewed upward momentum once into the New Year.
“Our EUR/USD forecast looks for the McDonald’s Big Mac PPP fair value of 1.25 to be reached in a year’s time, from where a steady rise is likely,” says Juckes.
Bank of Japan to remain a hostage of the Japanese Yen
The Bank of Japan will increasingly be hostage to the Japanese Yen as the economy improves and inflation picks up, the time for policy normalisation will draw closer.
However, as has been evidenced by the European Central Bank’s move toward tapering and the Federal Reserve before it, stepping away from the punch bowl is always easy.
“The BoJ’s main concern looking ahead is probably the same as it for
every other central bank (bar the Fed, now) – that the merest hint of a change in direction will result in uncontrollable currency strength,” says Juckes.
Juckes forecast the USD/JPY exchange rate to be around 110.0 at the end of 2018, only a fraction higher than its Monday level of 108.80.