- Updated currency projections from ING Investment Bank – March 2022 update.
- The conflict in Ukraine will undermine the European economy.
- The US dollar will also benefit from defensive demand and Fed tightening.
- EUR/USD is expected at 1.08 in 1 month before rebounding to 1.14 in 12 months.
- Sterling will be held back by soaring energy prices and BoE hesitation from mid-year onwards.
- EUR/GBP losses should be limited to the 0.82 area.
- Commodity currencies should make net gains to varying degrees.
Major concerns about the European economy
According to ING, the Russian invasion of Ukraine will have major implications for the global economy and there will also inevitably be a major impact on asset prices with potential tectonic shifts in exchange rates.
The greatest impact is likely to be seen in Europe given its proximity to the conflict as well as the major economic and political implications.
ING banknotes; “President Putin’s terrifying invasion of Ukraine has changed the European political landscape.”
He considers that the war will have a significant negative impact on the economic prospects of the euro zone; “The net macro-financial effect is a stagflationary effect – where the world will end up with lower growth, higher inflation and greater uncertainty.”
The overall impact on the US economy will be more limited, especially given a much higher degree of energy independence. The dollar is also in demand during times of major uncertainty in the global economy and financial markets.
ING banknotes; “Liquidity, safety and relative energy independence will keep demand for dollars as long as this crisis continues.”
The bank also expects the Federal Reserve to continue interest rate hikes this year with at least four rate hikes.
Given the firmness of demand for dollars and the vulnerability of the euro zone, ING inevitably expects downside risks for the euro against the dollar (EUR/USD) in the short term.
He notes; “Expect EUR/USD to trade in a range of 1.05-1.10 in the short term. A Fed still determined to increase – 4 to 6 times this year – will keep the dollar supply going .
EUR/USD is expected at 1.08 on 1 month, but maintains the 12 month forecast at 1.14.
Yields and safe-haven demand dominate the dollar bloc
ING also expects rising US short-term yields to support the dollar against the yen.
“Given that the Fed seems determined to start its tightening cycle this year (some US inflation is domestically generated), we still prefer the strong dollar environment which is dragging the $/JPY to 120.”
ING also expects the Chinese yuan to maintain a firm tone given the possibility of further potential safe haven demand.
The Swiss franc posted solid gains and the euro to franc exchange rate (EUR/CHF) briefly dipped below parity for the first time in more than seven years.
ING notes that the immediate risks relate to further franc gains with doubts when the sale of francs will resume given the European risk profile; “A recovery cannot be seen until a new balance is found in European politics.”
At this stage, it expects a new parity test, but the 12-month forecast remains at 1.10.
Energy prices will hurt the UK economy
ING notes that soaring energy costs will have a significant impact on the UK economy and there will be noticeable knock-on effects on household spending; “a further rise in energy prices will really start to hit consumption later this year.”
The bank expects the Bank of England to raise interest rates in March and May, but then takes a break to assess developments. In this context, spreads are likely to move against the pound if the Fed continues to tighten.
Overall, ING is less confident about the possibility of a rebound in the exchange rate between the pound and the dollar (GBP/USD); “A rally in the cable towards the end of the year is based on the idea that European currencies benefit from a reprieve in 2H22. This thesis is under heavy pressure and the downside risks of the GBP must be hedged.
The GBP/USD 12-month forecast stands at 1.36 for now.
The bank is more confident about the outlook for the pound against the euro given the underlying vulnerability of the euro zone. The FTSE 100 Index should be resilient given the weightings of global commodity companies.
He notes; “UK equities largely outperformed Europe, which may have helped sterling.”
Given the vulnerability of the euro zone, the bank expects the pound to be able to rise in the short term, but could be vulnerable at the end of 2022 if the ECB tightens its policy; “We suspect the GBP may generate further gains, but EUR/GBP should rise if the ECB rises in 4Q22.”
Fundamental attractions for commodity currencies
The conflict in Ukraine has put strong upward pressure on commodity prices and the underlying trend is expected to remain strong given the potential for supply disruptions and potential stockpiling which will increase demand.
The Canadian dollar will receive net support from strong energy prices, which will help offset potential negative influences from Fed tightening and global risk aversion.
According to ING; “The loonie is somewhat shielded from the fallout from the Ukraine conflict, largely thanks to rising crude prices.”
Strong commodity prices will clearly benefit the Australian economy through exports and stronger terms of trade, but ING does not expect the Reserve Bank to meet market expectations for rates of interest, which will limit the possibilities of foreign exchange gains.
He notes; “Rate expectations still look too hawkish though, which means a somewhat contained medium-term upside for the AUD.”
The bank, however, remains bullish on the New Zealand dollar given the hawkish rhetoric and the potential for a series of rate hikes from the Reserve Bank of New Zealand (RBNZ).
“We see no reason at this time to believe that the Bank will be underdelivered, which should allow NZD to benefit from an attractive rate profile over the medium term.”
All three currencies are expected to make net 12-month gains.
The Norwegian krone should benefit from net support from the high level of gas prices, while the Swedish krona has the possibility of a notable recovery if the geopolitical situation improves.
Table of ING’s foreign exchange forecasts covering the period 2022-2023
|Pair||square||1 month||3 months||6 months||12 months|
|EUR/EUR||10.75||10.90||10:60 a.m.||10:40 a.m.||10:20 a.m.|