Nordea Investment Bank 2022-2023 Exchange Rate Forecast
- Nordea investment bank exchange rate forecasts – updated June 2022.
- Overall market volatility will be higher as central banks tighten their efforts to fight inflation.
- Aggressive Fed rate hikes and tighter financial conditions will support the dollar.
- EUR/USD should slip towards parity by the end of 2022 before the dollar loses ground in 2023.
- Sterling is expected to lose ground as the Bank of England lags other major central banks.
- EUR/GBP is expected to strengthen to 0.9000 at the end of 2023.
- Scandinavian currencies will provide only temporary recoveries.
Central Banks’ High-Wire Act Will Fuel High Volatility
Nordea notes that global central banks have had to take much more hawkish policy stances as inflation has risen sharply amid high uncertainty about the outlook.
He expects global trends to remain very challenging over the coming months and conditions are likely to be in place for further significant moves in asset prices.
He notes; “Elevated volatility is set to continue and risky assets are likely to remain under pressure, as markets speculate on how far central banks need to raise rates to keep inflation under control, and whether that can be done without tipping the economy in recession at the same time.”
Aggressive Federal Reserve tightening is needed
As for the Federal Reserve, Nordea expects the central bank to be much more aggressive. He expects another 75 basis point hike in July with 50 basis point hikes for September and November, followed by further increases to a high of 4.25%.
Nordea also notes that there will be notable implications for the economy; “Importantly, the Fed has also become more realistic in its thinking that it will have to slow the economy significantly to bring inflation down. .
Nordea notes that global financial conditions have now moved to a more neutral level, but there is a significant risk that central banks will be forced to be more aggressive.
He adds; “To bring inflation down, we will likely need to see financial conditions well into restrictive territory.”
Nordea expects the US economy to be less sensitive to interest rate increases given the accumulation of savings and wealth effects. There is therefore a risk that the Fed will have to raise its rates further to bring inflation down.
This will mean uncomfortable choices for the Fed and other central banks. According to Nordea; “Central banks are forced to choose between two undesirable outcomes: tightening to control inflation at the cost of tipping the economy into a recession, or not tightening and allowing inflation to erode real growth.”
Yield spreads will continue to support the dollar
Nordea expects the ECB to take a more cautious stance in tightening monetary policy, with interest rates moving to a neutral rate around 1.75%.
The bank expects the Fed’s hawkish policy to support the dollar and the US economy to outperform.
He adds; “Through the end of 2022, we still believe the USD will outperform other G10 currencies thanks to the Fed’s hawkish monetary policy and our expectations of economic outperformance in the US versus the Eurozone. .”
Given the importance of central bank policies, comments Nordea; “We remain negative on the JPY due to a still very dovish Bank of Japan.”
He predicts a peak of the dollar to the yen (USD/JPY) at 140 at the end of 2022.
Expectations for the Swiss franc have been strengthened following the National Bank’s policy tightening, with the euro/franc (EUR/CHF) exchange rate expected to trade below parity next year.
The bank expects overall volatility to remain elevated, especially given swings in risk appetite and potentially sharp moves.
Overall, he expects there to be net losses for the euro to dollar (EUR/USD) exchange rate; “The latest move by most other G10 central banks to more aggressive policy will likely keep markets volatile and support our view that EUR/USD will drop to parity (1.00) in the second half of the year. This year.”
Nordea expects the dollar to lose ground in 2023 with reprieves for the euro and the yen.
Sterling firmly out of favor
At this point, Nordea expects central banks in Sweden and Norway to struggle to make progress in the near term, with central banks favoring a slower pace of rate hikes.
He sees the possibility of a gradual recovery of the Scandies against the euro.
He also remains cautious about the outlook for the UK and the tightening of financial conditions will tend to undermine the UK currency. He adds; “The same goes for the GBP, which will struggle to gain ground due to the economic difficulties in the UK and an economy that finds itself with weakened potential growth after Brexit.”
Indeed, the bank has significantly lowered its forecast for the British pound, with the pound-dollar (GBP/USD) exchange rate below 1.2000 throughout the forecast period.
Table of Nordea currency forecasts covering the period 2022-2023.
|Pair||place||3 months||December 22||june23||December 23|
|EUR/NOK||10:45 a.m.||10.50||10:25 a.m.||9.80||9.50|
|EUR/EUR||10.69||10.50||10:40 a.m.||10:30 a.m.||10:20 a.m.|