The Fed faces an increasing pressure to raise rates and taper bond purchases. That leaves an outlook of higher USD real rates, which by extension diminishes the topside risk to EUR/USD. The development of EUR/USD hinges on the course of action whether verbal or rate intervention from the Fed. Commodity currencies have enjoyed a recent bounce in commodity prices, incl. oil but with the outlook for a turn in global manufacturing PMIs and a stronger USD that in our view limit the topside. Also a turn in the industrial cycle and weak domestic inflation dynamics pose a headwind for SEK. UK virus concerns and a bounce in the EUR recently brought EUR/GBP to the highest level since early March.
We keep our current profile unchanged, in favour of USD. The key risks to watch are 1) the expectations to US recovery must be met, 2) questioning if EU can surprise on the upside and/or 3) the state of the next leg in US-China tariffs. As has been the case since the onset of COVID, the potential outcomes for EUR/USD are very wide, irrespective of us seeing a stronger dollar in our base case.We still target EUR/USD at 1.15 in 12M.
We have seen a significant repricing of the Bank of England (BoE) in Q1. It is not long ago a negative BoE Bank Rate was a theme, but now the first 15bp rate hike is priced already in November 2022, which would take the Bank Rate back to 0.25%. We think this is slightly to the aggressive side, as we do not expect any hikes through 2022, at the moment. Eventually, the BoE is likely to tighten monetary policy earlier than the ECB.
EUR/GBP has followed EUR/USD slightly higher over the past month. Just like for EUR/USD, we think the recent EUR/GBP increase closer to 0.87 is a bump in the road and remain bullish on GBP, as we are still more upbeat on the UK than on the euro area. Near-term we expect EUR/GBP to trade around the current levels before the cross starts to move lower again. We still forecast EUR/GBP will trade in 0.83 in 12M.
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