FX Talking: Time to revise the dollar forecasts

Having been bearish on the dollar since April 2020, this month we feel compelled to outline a more positive medium-term scenario. At the heart of this is the likelihood that the Federal Reserve’s exit sequence from ultra-loose monetary policy is more compressed than they would have us believe. ING now sees the first hike in 3Q22.

The earlier-than-expected Fed tightening cycle suggests our prior end-2021 EUR/USD forecast of 1.28 was just too high. Yet November and December are seasonally weak months for the dollar and assuming that the eurozone recovery goes to plan, EUR/USD should still rally to the 1.23 area. 2Q22 is when the dollar should be rallying more broadly – coinciding with some decisive bearish flattening in the US yield curve.

1.17-1.23 may well be the rough trading range for EUR/USD for the next six months – after all, Fed tapering does not necessarily mean lift-off in the dollar. This consolidative environment can allow local stories to play out. Despite the recent (exaggerated in our minds) correction, commodity currencies should still do well. Norway may hike twice this year, and Canada and New Zealand may not be far behind. We could see all of these retesting their cycle highs against the dollar later this year.

And in the developing world, front-loaded tightening cycles in the likes of Brazil, Mexico, Russia and even in the CE3 FX space would favour outperformance of these currencies despite the recent correction. Most disappointing has been Asian FX, where pockets of Covid-19 are taking their toll. These, including the renminbi, may struggle to recoup recent losses.