ABN Amro concede they were too optimistic on US dollar strength in 2016, a view that should allow the under-pressure GBP/USD some respite.
We reported back in November that ABN Amro were forecasting the GBP to USD conversion to fall down to 1.25 in 2016.
This was a notable call as it was well outside of consensus at the time and fired the starting gun on the Brexit-inspired how-low-can-it go debate.
Now most foreign exchange institutions are playing catch-up on the view and have conceded that they have been too slow to factor Brexit risks into their forecasts.
However analysts at the Dutch bank have now pared back the negativity on that GBP/USD forecast after factoring in a more benign US dollar environment.
Indeed, the scale and speed of US dollar declines in 2016 have caught many by surprise.
“Originally we were of the opinion that the US dollar would still have a last leg of substantial strengthening. We no longer hold on to this view. There may be some dollar upside versus majors in the near-term if sentiment improves and other central banks ease monetary policy further,” says Georgette Boele, Co-ordinator of FX & Precious Metals Strategy at ABN Amro.
In short, ABN Amro don’t expect the US dollar to reach new highs anymore.
This is because also Fed is forced to take into account the negative effect of a strong US dollar on the US economy.
“As a result of these opposing forces, our forecasts look quite flat especially in EUR/USD where we expect weakening towards 1.05 but not beyond,” says Boele, “in 2017, expectations of tapering by the ECB will be seen by financial markets as a prelude for subsequent tightening and will hence exert and upward pressure on the euro at a time that the Fed is tightening.”
The bank remains negative on sterling, because they expect the Brexit referendum to weigh on sterling for the coming months pushing GBP/USD towards 1.35.
Bank of America Cut US Dollar Foreasts
In another case of a big bank down-shifting expectations for the Greenback the team at Bank of America have told clientsthat they have upgraded their euro / dollar forecasts.
“On the back of our economists change to 2 from 3 Fed hikes this year, the addition of a significant risk episode of US QE and our equity strategists revised forecasts, we now expect: EURUSD to end the year at 1.00,” the bank said.
They also substantially revised down their outlook for USD/JPY, now expecting a drop to 110.00 from a previous forecast of 120.00.
BNP Paribas: USD to Struggle
Fresh news in from BNP Paribas who have added their latest views to the institutional analyst debate on the USD's outlook.
The French bank say the USD’s bounce this week vs the EUR and JPY is not expected to persist as 'Fed hiking expectations' will likely be slow to recover.
“We do not expect the markets to rebuild Fed rate hike expectations, and front-end rates are likely to stay low. Moreover, we expect the risk environment to remain quite challenged as we move through Q1, leaving current account surplus currencies well-supported at the expense of deficit-backed currencies," says Daniel Katzive at BNP Paribas.
US Dollar Finding Support as Fed Interest Rate Rises in 2016 Still Possible
We have seen the USD come under notable pressure in February; perhaps a sign of things to come in 2016 as the US Federal Reserve steps back from agressively pushing interest rates higher.
In fact markets had started completely pricing out rises for this year.
That said, sentiment towards the USD has stabilised over the past few days as markets take a breather and realise the US economy and global financial situation is not as necessarily as bad as previously thought.
This was confirmed by the US Federal Reserve who released the minutes to their January meeting overnight.
Downgrades appear to have been the order of the day the risks to the projection for inflation were seen as weighted to the downside.
The continued slide in oil prices and the stronger US dollar were cited as being drivers for the slight cut to inflation expectations.
Furthermore, while the Fed were happy with the current employment situation they viewed the risks to its outlook for the unemployment rate as skewed to the upside.
The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks.
But, the key takeaway is that the Federal Reserve is yet to be shaken, as was Janet Yellen when she appeared before the US Congress.
“While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic out-look,” says Magne Ostnore at DNB Bank in Oslo.
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