BNP Paribas exchange rate forecasts: 2021-2022
- BNP Paribas investment bank 2021-2022 foreign exchange forecast – update July 2021
- Global economic recovery will be a key driver of exchange rates
- Fed tightening will support dollar against euro and yen
- EUR / USD will weaken from current 1.18 to 1.15 by the end of 2022.
- Attractive valuations will support the pound sterling.
- Strong export earnings will support commodity currencies.
Foreign exchange analysts at BNP expects the dollar to make gains over the next 18 months. The advance should be limited given the general lack of support for yields with gains concentrated against the Euro, Yen and Swiss Franc.
The bank expects relatively narrow ranges to prevail in global exchange rates.
Advance of the US dollar against low yielding currencies
BNP Paribas expects a stronger global economy to be a key driver of exchange rates in the second half of 2021.
On the dollar, the bank expects the Federal Reserve to take a measured step towards tightening policy, especially with strong US demand.
“As the US recovery continues and the Fed moves closer to reducing policy accommodation, we expect US real yields to rise slightly.”
BNP expects rising yields to provide some support for the dollar, but the absolute level of yields will remain relatively unattractive. In this environment, the dollar’s gains should be concentrated against currencies where central banks will be even slower to tighten their monetary policy.
BNP examines longer-term trends in business cycles and notes that the dollar tends to strengthen before interest rate hikes from the Federal Reserve before weakening once rates actually rise.
“The gains in USD will likely be the most pronounced against currencies where the market cannot predict a meaningful exit from accommodative monetary policy, notably the CHF, JPY and EUR.”
The Euro-dollar exchange rate (EUR / USD) is expected to weaken to 1.1400 at the end of 2022.
Export revenues increase commodity currencies
As the global economy tends to normalize, BNP expects there to be investor support for currencies where commodity earnings are strong or where interest rates are expected to rise.
By contrast, we expect a number of emerging market and G10 currencies exposed to commodities or in which central banks are likely to rise in tandem with – or before – the Fed to hold up well and even outperform the USD. “
Against this backdrop, he expects commodity currencies to maintain a firm tone and stand up to the US dollar.
British pound (GBP) exchange rates remain attractive
BNP remains constructive on the outlook for the pound sterling. The bank expects UK yields to rise further, as the Bank of England is likely to be one of the first players to remove accommodation policies.
“When comparing market prices for rate hikes in the G10, the Bank of England appears to be pricing conservatively, especially given its less restrictive forward outlook. “
UK assets continued to underperform over the 2016-2020 period as Brexit uncertainty dampened investor inflows. According to BNP, a new catch-up effect is possible in the coming months.
“We also maintain our positive view on UK stocks as these have lagged behind the larger rotation to Value stocks which could benefit the GBP.”
The euro to pound exchange rate (EUR / GBP) is expected to weaken to 0.83 by the end of 2022.
Above: Table of BNP Paribas currency forecasts covering the period 2021-2022.