FX Talking By ING Economics - EUR/JPY, EUR/GBP And EUR/CHF – Detailed Analysis And Forecast

NZD/USD: Reserve Bank Of New Zealand Is Expected To Hike The Rate By 50bp

Developed markets

EUR/JPY

The worst of both worlds

Current spot: 138.79

• EUR/JPY is being hit by the double-whammy of European stagflation and the global bear market in equities. On the former the focus is very much on natural gas and whether the likes of Germany are completely cut off from Russian supplies. Such an outcome would cement already strong fears of German and eurozone recession. We see a technical recession in 4Q22/1Q23.

• For the ECB, the challenge will be to threaten even more hawkish policy – even as Eurozone growth fears sink the euro. We think ECB can only deliver 100bp of the 175bp tightening priced.

• A long hot summer for risk should see JPY in demand. A short squeeze in JPY & fresh shorts in EUR could see EUR/JPY trade 132.

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EUR/GBP

BoE can prevent a worst case outcome

Current spot: 0.8465

• The energy surge has hit both the UK and the Eurozone equally (terms of trade losses), but GBP looks to be outperforming on the back of a more hawkish BoE. Unlike in May when the last BoE inflation report was released, the BoE in August might embrace the tightening expectations priced into the market as a means to keep GBP supported. Who wants a weaker currency right now?

• EUR/GBP has outside risk to the 0.8300 area – should EUR/USD’s break of 1.00 generate fireworks. But a difficult risk environment this summer should send EUR/GBP back up to 0.85/86.

• Wild card: will the new UK PM being any less hostile to Brussels Source: Refinitiv, ING forecasts and could that help GBP? We should find out in September.

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EUR/CHF

No messing around from the SNB

Current spot: 0.9929

• Last month the SNB ripped up its prior script, hiked 50bp and implied it could be intervening in FX markets to strengthen the CHF. We had warned of that risk last month - in that the SNB wanted the real trade-weighted CHF to remain stable. Because of low Swiss inflation compared to trading partners, a stable real CHF now requires a stronger nominal CHF.

• In practise this may mean the SNB wants EUR/CHF 4-5% lower on the year – perhaps lower were USD/CHF to break above 1.00.

• No longer is the CHF ‘highly valued’. Expect another large rate hike from the SNB in September (perhaps 75bp if the ECB has Source: Refinitiv, ING forecasts done 75bp by then?) and EUR/CHF to remain offered throughout.

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EUR/NOK

It’s going to take some time for NOK to recover

Current spot: 10.30

• NOK has remained weak as its relatively low liquidity makes it vulnerable to global risk sentiment deterioration. The recent woes in the oil market are another reason for concern.

• We think some more weakness over the coming weeks is possible, but the outlook for the latter part of the year and 2023 remains rather constructive, thanks to an attractive rate profile (NB to tighten by 100bp more by year-end) and good exposure to higher energy prices and increased demand for exports.

• In our view, there is some room for a return below 10.00 in EUR/NOK by the end of the year, but that will mostly depend on a stabilisation/recovery in global risk assets.

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EUR/SEK

Riksbank’s fast tightening can’t help SEK now

Current spot: 10.72

• Following the recent hawkish shift, we expect the Riksbank to deliver another 50bp rate hike in September, followed by 25bp in November.

• A hawkish Riksbank may still fail to lift the krona, which is negatively exposed to the global (and especially European) economic woes and risk-off environment.

• In the near term, we may well see a spike above 10.80 in EUR/SEK, but there could be room for a return to the 10.50-10.60 area by the end of 3Q. A stabilisation in risk sentiment in 4Q may help EUR/SEK reconnect with a deeply negative rate differential and bring EUR/SEK close to 10.20-10.40.

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This article is a part of the report by ING Economics

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This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

NZD/USD: Reserve Bank Of New Zealand Is Expected To Hike The Rate By 50bp

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