Next 6-12 Month Foreign Exchange Forecasts: ING July 2022

• 2022-2023 exchange rate forecasts from investment bank ING – update July 2022.
• Vulnerable risk conditions will contribute to further short-term dollar strength.
• The Euro-Zone will be vulnerable due to an energy crisis, undermining Euro support.
• EUR/USD vulnerable to a slide below parity, but with a recovery to 1.12 on a 12-month view.
• The yen and Swiss franc will be supported by vulnerable risk conditions.
• Fragile risk appetite will limit Sterling support despite further BoE rate hikes.
• GBP/USD can recover to 1.29 on a 12-month view.
• The Canadian dollar is best placed among commodity currencies with USD/CAD losses.

Risk Appetite will Remain Vulnerable

ING expects that developments in the global economy and risk appetite will be key factors determining exchange rates in the short term.

The bank overall takes a notably cautious stance with fears that central banks will continue to increase interest rates in order to combat inflation while high energy prices will undermine the global economy.

In this environment, the bank recession fears will increase and expects equity markets will remain vulnerable with the risk that there will be a further retreat.

The bank also expects that risk aversion will have a significant impact in driving exchange rates with initial defensive dollar demand.

Europe more Exposed than the US to Energy Crisis

ING considers that Europe is more exposed to unfavourable conditions than North America.

It notes; “The stagflationary effects of the war in Ukraine are being felt far more in Europe than in N. America. Thus, short term rate spreads continue to move against EUR/USD as does the risk environment, where equities could have another 10% leg lower.”

The Euro-Zone vulnerability will also make it very difficult for the ECB to conduct monetary policy.

It adds; “The ECB in particular faces the conundrum of trying to address inflation fears, while at the same time trying to avoid driving the Eurozone economy into recession.”

Given these fundamentals, ING expects the Euro will continue to struggle during the summer.

It adds; “Don’t look for a substantial turn higher in EUR/USD this summer, since it seems far too early for Fed hawks to back down.”

ING sees the threat of EUR/USD trading below parity in the short term, but does not forecast a sustained move below this level.

The bank also expects that the dollar will fade later in 2022 as hopes for peak interest rates increase which will allow Euro relief.

Yen and Swiss Franc Support

The Japanese yen has remained under pressure with the Dollar to yen (USD/JPY) exchange rate surging to 23-year highs above 137.50 before a limited correction.

ING expects that vulnerable risk conditions will underpin the yen over the next few months.

It adds; “Slowing demand is taking its toll on equity markets, which look vulnerable as central banks tighten further even as growth slows. The JPY, like the USD and CHF, should out-perform this summer.”

ING notes the important shift by the Swiss National Bank (SNB) as it raised interest rates in June. It also notes that the SNB may have been intervening to strengthen the Swiss currency.

The bank notes; “Because of low Swiss inflation compared to trading partners, a stable real CHF now requires a stronger nominal CHF.”

The bank has raised its Swiss franc forecasts sharply with the Euro to Franc (EUR/CHF) exchange rate forecast below parity throughout the forecast period.

Sterling Vulnerable on Risk Conditions

ING expects that the Bank of England will maintain a tough stance on monetary policy in the short term in order to combat inflation; “With UK CPI expected to push up to 11% in October, expect the BoE to stay hawkish and to hike 50bp on August 4th.”

A firm near-term BoE stance would offer some short-term Sterling support and the bank also notes that a looser fiscal policy under a new Conservative leader would also offer some backing for the Pound.

ING, however, expects there will be an important limit to BoE rate hikes given economic vulnerability.

It also considers that global market conditions will undermine the UK currency, especially in the short term; “Yet, as a growth-sensitive currency, sterling will be in a for a tough summer and Cable looks set to trade down to 1.17 and possibly 1.14/15 again.”

GBP/USD is set to recover gradually on a 12-month view as the dollar fades.

Mixed Outlook for Commodity Currencies

The global economic outlook will have an important impact on commodity currencies.

As far as the Canadian dollar is concerned, ING expects that there will be Canadian dollar resilience. It notes; “As markets trade increasingly in line with recession fears, North America’s lower exposure to global headwinds is good news for CAD.”

The Reserve Bank of Australia will increase interest rates, but ING expects domestic developments will be of secondary importance for the currency; “AUD should continue to be driven almost solely by external drivers.”

In this context, vulnerability in the global economy will limit near-term AUD support.

As far as the New Zealand dollar is concerned, ING expects that the economy will stumble; “We think there is an increasing risk of the RBNZ having to review its rate profile lower in August, or anyway by the end of the year.”

Table of currency forecasts from ING covering period 2022-2023.