📝U.S. Dollar to Strengthen Further As Global Financial Conditions Tighten: Danske Bank

Fed focuses on a scenario of substantial rate hikes and unwinding the held bonds. ECB will equally seek to raise rates, though moderately – starting in July. In our view, this is set to substantially tighten financial conditions and is intended to ensure inflation peaks out over the year of 2022. We have already seen that risk-seeking behaviour is being strongly curtailed on the back of these coordinated CB efforts. Fundamentally, the US should continue to be a high(er) interest rate market and equities continue to appeal to foreign investors. This means the US is likely to attract capital, which helps the USD. The coordinated tightening of global financial conditions, broadening USD strength and downside risk to the euro area make us keep our focus on EUR/USD moving still lower (targeting 1.00) – a view not shared by consensus.The key risk to shift EUR/USD towards 1.15 is seeing global inflation pressures fade and industrial production increase. The upside risk also include a renewed focus on easing Chinese credit policy and a global capex uptick but neither appear to be materialising, at present. Recommend selling USD via risk reversals for income hedging, purchase USD via forwards for expenses hedging.

- Danske Bank Research