The US dollar would offer short-term protection against headwinds as the euro outperforms and the pound’s fortunes are held hostage by Brexit negotiations, according to a leading City Analyst.
In a note to clients, Richard Falkenhäll, senior FX strategist at Nordic bank SEB, said the outlook for the dollar remains mixed as tailwind from monetary policy and higher interest rates has diminished. “Going forward this could in fact become a headwind for the dollar. Growth is strong but hardly a surprise any more. Improved capital flows are likely insufficient to strengthen the dollar.
“However, the greenback has regained its defensive qualities and will probably strengthen on any unexpected negative event hurting risk appetite. This is likely to keep the USD supported at least this year. We see EUR/USD at 1.12 by the end of 2018.”
As for the euro, the currency is again appreciating on the back of the weaker US dollar, Falkenhäll noted. “We believe the long-term USD outlook is poor and a stronger euro is likely. Still, over the next few months, we doubt the euro will continue to strengthen much further given the soft outlook for monetary policy and continued risk premia on and likely continued underperformance by European assets. The European Central Bank (ECB) is not about to change policy anytime soon.”
Finally, the GBP’s direction is going to be all about Brexit negotiations, the SEB analyst noted. “A call on the GBP remains a call on the outcome of Brexit talks. The British currency remains long-term undervalued due to the Brexit risk premium.
“If a deal is concluded that can be ratified by all national parliaments, its upside potential is substantial. This is what we believe will happen. We expect EUR/GBP to fall back to 0.86 by the end of 2018 and we see EUR/GBP reaching 0.93-0.95 before this occurs.”
