Foreign Exchange Rate Forecasts 2023-2024 From Danske Bank

• 2023-2024 exchange rate forecasts from Danske Bank – update April 2023.
• Restrictive Fed policies and tighter financial conditions will underpin the dollar.
• The hawkish ECB stance will limit Euro losses and could allow further near-term gains.
• EUR/USD is still forecast to weaken over the medium term, but not below parity.
• A Bank of Japan policy tightening will strengthen the undervalued yen.
• Sterling is likely to be held in tight ranges with GBP/USD drifting lower from 1.25 high.
• Commodity currencies are expected to drift lower amid the firm US dollar.
• The Norwegian krone will need much lower Norges Bank krone sales to regain ground.

Fundamentals Still Back Dollar Gains

Danske Bank has been consistent in expecting dollar strength during the past few months and there is no major change in stance in the latest update.

According to Danske; “A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions.”

The bank expects that the Federal Reserve determination to quash inflation and an overall monetary policy tightening will tighten financial conditions.

As far as Federal Reserve policy is concerned, it expects that the Fed will decide on a final 25 basis-point rate hike to 5.25% at the May meeting.

Importantly, the bank does not expect that the Fed will cut rates this year, in contrast to market expectations of significant rate cuts which will underpin the dollar.

ECB Stance will Offer Some Euro Protection

As far as the Euro is concerned, it adds; “We maintain the strategic case for a lower EUR/USD based on relative terms of trade, real rates and relative unit labour costs.”

Danske does, however, also expect that the ECB will maintain a hawkish policy stance.

It expects the bank to increase rates by a further 100 basis points over three meetings which would take the main refi rate to 4.50%.

The ECB tightening will provide Euro support, especially if the Euro-Zone economy holds firm.

In this context, it adds; “Near-term euro area growth optimism, relative rates and lower energy prices could add temporary EUR support. A key factor to keep an eye on in the coming month is a potential turnaround in euro area activity data.”

The Euro to dollar (EUR/USD) exchange rate forecasts have been raised, but it is forecast to weaken to 1.03 on a 12-month view.

Yen Substantially Undervalued

Danske Bank expects that the Bank of Japan will shift monetary policy over the next few months with a move to adjust yield curve control and let longer-term yields increase.

It considers the most likely timing is the June or July policy meetings and that any shift will boost the yen.

Ahead of any policy change, the bank considers that the yen could weaken in the near term on relative yields.

Longer-term, it expects the yen to strengthen; “Overall, USD/JPY seems fundamentally overvalued, and together with our base case of monetary policy tightening during summer; we expect the cross to drop to 127 in 3M.”

Pound Range-Bound Against the Euro

Danske Bank expects that the Bank of England will sanction only one more rate hike to 4.50%.

Given that markets are expecting peak rates of 5.00%, this implies downward pressure on the Pound against the Euro, especially with a hawkish ECB policy stance.

The bank, however, expects relatively subdued moves in the pair with scope for potential capital inflows into UK assets.

It adds; “At present, we do not see the relative growth outlook or global investment environment to create significant divergence between EUR and GBP. We thus expect the cross to remain range bound around 0.88.”

Limited Support for Commodity Currencies

Danke Bank expects that the Australian dollar will struggle for support despite the potential for a strong rebound in the Chinese economy.

According to Danske; “With the global growth backdrop remaining weak and central banks broadly still on a tightening bias, the outlook for AUD/USD remains modestly negative.”

It does consider the potential for near-term gains if global risk appetite strengthens.

The bank expects that the Canadian dollar will perform relatively well and adds; “we also think CAD is in a relatively strong position compared to peers which limits the topside potential in USD/CAD.”

Overall, commodity currencies are forecast to be in tight ranges against the us dollar.

Still Waiting for a Krone Recovery

As far as the Norwegian krone is concerned, the bank continues to consider that the Norwegian currency is substantially undervalued.

The currency will, however, remain vulnerable if risk appetite weakens and aggressive monetary policy stances outside Norway will also undermine currency support.

According to Danske, substantial decline in Norges Bank krone sales may, therefore, be needed before the currency can regain ground.

The overall forecast profile has a weaker Norwegian krone.

Danske expects that the Swedish Riksbank will have to raise interest rates by at least a further 100 basis points given the combination of a very high inflation and weak currency.

Higher rates could underpin the krona, but the currency situation, however, is finely balanced, especially as a more aggressive monetary policy will undermine the economy with particular concerns over the housing sector.

Table of Currency Exchange Forecasts for Next 6-12 Months