We talked a week ago about what experts at the world’s biggest banks and agencies think about the behavior of the EUR / USD pair through 2022. And the fact that we paid attention to it in the first place makes some sense. : after all, this pair is the most traded in the Forex market, and the European currency itself leads with a huge margin in the formation of the DXY US dollar index, with 57.6%.
Recall that DXY was developed by the US Federal Reserve in 1973 and shows the ratio of the US dollar to a basket of 6 major world currencies. This basket includes the euro (57.6%), the Japanese yen (13.6%), the pound sterling (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2 %) and the Swiss franc (3.6%).
In our opinion, the economic situation in the world has changed a lot in the almost half a century since DXY was founded. And at least the Chinese yuan should have appeared in the basket. Therefore, below we will take a look at the outlook for the two currency pairs that make up the dollar index: USD / JPY, GBP / USD, USD / CAD, USD / SEK, USD / CHF and a few others, AUD / USD, NZD / USD, EUR / GBP and USD / CNH.
USD / JPY: Japan needs a weak yen
We know that inflation, along with the recovery of the labor market, is one of the two main factors on which central banks focus in their monetary policy.
The positive GDP gap is also called the inflation gap because it indicates that the growth of aggregate demand exceeds the growth of aggregate supply and accelerates inflation. This, according to the IMF, will be observed in the United States (+ 3.3%) and Canada (+ 0.8%) in 2022. And regulators will have to take active measures to tighten their monetary policy in order to contain the inflation. And this, according to experts from the Dutch banking group ING (Internationale Nederlanden Groep), will give the currencies of these countries, mainly the USD, an advantage over the currencies of countries where the GDP has a negative spread. It is also called recession because excess supply over demand is the path to deflation.
The recession gap has been observed since 2008 in Japan and is expected to repeat in 2022. This is why the Bank of Japan’s policy is one of the most accommodating among the central banks of other countries, and the interest rate on the yen has long held a negative level, minus 0.1%.
Bank of Japan chief Haruhiko Kuroda recently said that a weak yen would rather help the country’s economy than hurt it. According to the senior official, if the yen falls, it will support exports and corporate profits.
The ING group believes that such a differentiation between the approaches of the US Federal Reserve and the Japanese regulator will strengthen the dollar’s position against the yen. Their quarterly forecasts for USD / JPY for this year is: Q1 – 114.00, Q2 – 115.00, Q3 – 118.00 and Q4 – 120.00.
French financial conglomerate Societe Generale estimates the probability that the pair will rise to 116.00 in the second quarter at 50%, and up to 118.00 – 25%. Experts are betting the remaining 25% on a bearish scenario and the pair falling to 110.00.
Analysts from other major global banks also prefer the dollar. However, unlike their ING counterparts, a number of forecasts peak not at the end, but in the middle of the year. Barclays Bank forecasts look like this: Q1 – 115.00, Q2 – 116.00, Q3 – 116.00 and Q4 – 115.00. Forecasts from CIBC (Canadian Imperial Bank of Commerce) paint a similar picture: T1 – 115.00, T2 – 116.00, T3 – 115.00, T4 – 114.00.
Reuters polled the biggest banks represented on Wall Street and published their experts’ opinion on the stocks of the USD / JPY pair in the second half – end of 2022. For the most part, forecasts point to a strengthening of the dollar: JP Morgan Q3 – 114.00, Amundi Q4 – 116.00, Morgan Stanley Q4 – 118.00. On the contrary, Goldman Sachs estimates that the pair will fall to 111.00 in 2023.
GBP / USD: at the crossroads of three roads
Regarding the future of the British currency, British investment Barclays Bank has taken a very patriotic position. Its strategists consider the pound to be strongly undervalued and predict that the GBP / USD The pair will return to 2021 highs and climb to 1.4200 by the end of the year.
Unlike most investment banks, Barclays believes that the US Federal Reserve’s policy does not provide strong support for the US dollar at all, which will lead to its moderate depreciation. The Bank expects other central banks to take a more aggressive stance than the Fed, with higher interest rates, thus limiting the attractiveness of the dollar. First of all, of course, we are talking about the Bank of England here.
As for the short-term outlook for the pound, Barclays analysts are more cautious here, as the impact of high inflation will neutralize potential support from a slight increase in interest rates. In addition, concerns about the new wave of COVID-19 and the difficulties with the EU due to Brexit must be taken into account. As a result, Barclays’ quarterly forecast is: Q1 – 1.3300, T2 – 1.3700, Q3 – 1.4000 and Q4 – 1.4200.
Capital Economics, one of the UK’s leading independent research centers, has taken the opposite position. Its specialists, on the contrary, anticipate a weakening of the pound, and evoke a combination of 1) weak economic growth, 2) slowing inflation and 3) sluggishness of the Bank of England. These three factors may lead the UK regulator to raise the rate to just 0.5% in the coming months instead of 1.0%, and thus disappoint the markets.
But, in addition to the growth and decline of the British currency, there is a third scenario. Analysts at ING Group predict that the pound will sit somewhere in the middle of a triangle made up of a stronger US dollar, stable commodity currencies and weaker low-yielding currencies. Therefore, according to their scenario, the GBP / USD The pair will move in a sideways trend: Q1-1.3300, Q2-1.3400, Q3-1.3400 and Q4-1.3400.
Other currency pairs
If Barclays Bank believes in its national currency, specialists at CIBC (Canadian Imperial Bank of Commerce) are quite pessimistic about the future. They believe the Canadian dollar could weaken this year. âMarkets have overestimated possible Bank of Canada stocks in 2022,â says CIBC, âand underestimated the Fed in 2022. The recalibration will leave the CAD out of favor with investors. Â»The bank’s forecasts for the USD / CAD the pair is: Q1-1.2800, Q2-1.2900, Q3-1.3000 and Q4-1.3000.
Experts from HSBC (Hong Kong and Shanghai Banking Corporation) believe that some currencies may still hold up against the stronger US dollar, notably the Australian dollar. HSBC believes the Reserve Bank of Australia could take a more hawkish stance, given the rather solid macro data.
ING strategists also do not rule out that the Australian dollar may benefit from an undervaluation and oversold. However, taking long positions on the AUD / USD pair, in their opinion, always carries a high risk.
In addition, according to ING experts, together with the euro (EUR / USD) and the Japanese yen (USD / JPY), the Swiss franc will also lag significantly behind the dollar (USD / CHF) in 2022 as well as the Swedish krona (USD / SEK).
Barclays Bank’s forecasts for other currency pairs included in brokerage firm NordFX’s palette of trading instruments are as follows: EUR / GBP : T1 – 0.87, T2 – 0.86, T3 – 0.85, T4 – 0.84 | USD / CHF : T1 – 0.91, T2 – 0.90, T3 – 0.90, T4 – 0.90 | AUD / USD : T1 – 0.75, T2 – 0.76, T3 – 0.77, T4 – 0.78 | NZD / USD : Q1 – 0.73, Q2 – 0.73, Q3 – 0.73, Q4 – 0.73 | USD / CAD : T1 – 1.23, T2 – 1.22, T3 – 1.21, T4 – 1.21 | USD / CHN : T1 – 6.35, T2 – 6.30, T3 – 6.40, T4 – 6.50.