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Currency markets have undergone a regime change that has turned the big picture trends of 2017 on their heads and, according to the latest forecasts from Lloyds Bank, the tide of international capital flows is likely to turn again before the year is out.
Mid-year foreign exchange forecasts released by the UK high-street lender comes amidst a strong recovery in the US Dollar which has now advanced 2.4% in 2018.
The Euro, the currency market's darling last year, has meanwhile given up a 500 point gain over the greenback to eventually trade close to a one-year low of 1.1515 in June.
It also saw Pound Sterling swap a more-than 5% gain over the Dollar for a 1.9% loss while against the Euro Sterling is seen trading relatively flat.
Driving the change of fortune have been superior levels of US economic growth, which have encouraged expectations the Federal Reserve may pick up the pace of its interest rate rises this year, at a time when growth in the Eurozone, UK and elsewhere has been waning.
President Donald Trump's "trade war", which began in earnest back in May, has also encouraged a bid for safe-haven assets and in doing so, supported the Dollar. And with the White House instructing US trade representatives Wednesday to push ahead with planning new tariffs on $200 billion worth of Chinese goods imports, drawing threats of retaliation from China, the "risk off" theme in markets looks set to continue for a while yet.
"Global trade tensions have escalated. US President Trump proceeded to implement tariffs on $34bn of Chinese goods, prompting immediate retaliation. Tariffs on a further $16bn of Chinese imports are expected. An escalation remains a risk, as President Trump has threatened to impose further tariffs, including on Chinese goods and EU cars," says Gajan Mahadevan, an FX strategist at Lloyds Bank.
It is against this backdrop that analysts at Lloyds have made their latest forecasts, which envisage a broad capitulation by the US Dollar later in the year and some respite for Pound Sterling and the Euro.
The Pound-to-Dollar rate was quoted 0.15% lower at 1.3238 Wednesday while the Pound-to-Euro rate was down 0.10% at 1.1292. The Euro-to-Dollar rate traded 0.05% lower at 1.1722.
"Since the middle of April, the pound has depreciated by over 8% against the US dollar, with GBP/USD dipping to a year-to-date low of 1.3050 in late June. However, there are tentative signs that the firmer UK economic environment has become supportive for the pair."
"BoE Chief Economist Haldane surprised the markets by voting for an immediate 25bp increase in Bank rate at the June MPC meeting. In addition, after observing the recent improvement in UK economic data, BoE Governor Carney stated that he had “greater confidence” in the UK growth outlook, raising the prospect that he too may be ready to tighten policy rates soon."
"However, the UK political climate remains very uncertain, with the recent resignations of the Brexit and Foreign Secretaries underlining the risks. The political situation will likely remain fluid as negotiations with the EU intensify in the coming months."
"As such, based on rate differentials and reduced uncertainty, we forecast GBP/USD at 1.38 by the end of this year. Political turbulence related to Brexit represents the key downside risk to our forecast."
"The pound has depreciated modestly against the euro in recent weeks, however, the currency pair remains largely confined to its narrow trading range between 1.12 and 1.16. This is despite an array of key uncertainties, including elevated UK and European political instability, lower expectations for economic growth, and fluctuating BoE and ECB policy rate trajectories."
"With market volatility measures at depressed levels, it seems market participants expect the range to hold. We are in line with this, forecasting GBP/EUR at 1.10 at end-2018 and 1.09 at end-2019."
"Political risks in Italy and Germany have subsided for now, while both the ECB and BoE are likely to “gradually” tighten monetary conditions. Similar policy paths may leave interest rates muted as a driver of the currency pair, while growth differentials currently favour the euro."
"The euro has extended its losses against the US dollar, to the tune of almost 6% since mid-April (1.24). Political uncertainty in Italy and Germany, a ‘dovish’ European Central Bank (ECB), ‘hawkish’ Federal Reserve (Fed), and the risk of an escalation in US/EU ‘trade wars’ have been key factors weighing on EUR/USD."
"However, having repeatedly tested and held the 1.15 level, we believe the pair could rally from here. The political climate across Europe has calmed somewhat and recent data appear firmer. Moreover, with market pricing already pointing to further hikes, the ability of US rates to drive USD strength appears limited."
"Meanwhile, the latest guidance from ECB Council members suggests a first rate rise in September 2019 is a realistic prospect. This is ahead of market pricing but in line with our forecast. As such, we believe interest rate dynamics may prove increasingly supportive for EUR/USD."
"With our fundamental models estimating EUR/USD ‘fair value’ at around 1.22, we remain broadly positive on the euro’s prospects, forecasting 1.25 for year-end."
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