At the heart of the USD’s 4% rally in 2018 is the question of whether US growth and interest rates are once again diverging away from the Rest of the World (RoW).
We don’t subscribe to this view – with the dollar move exhibiting classic signs of a counter-trend rally. Unlike 3Q17 though, heavier short USD positioning and thin market liquidity are likely contributing to the ‘speed’ of the current USD correction.
We believe that market expectations are now reflecting peak short-term economic divergence, meaning that the USD does not need to rally much further from current levels in the absence of a more pronounced decline in the RoW economic outlook.
Equally rate spreads have had little correlation with EUR/USD up until late April. Even if going forward they were to dictate EUR/USD moves, we would at best see a low of 1.17-1.18 this summer – before a broader recovery to 1.30 by the end of the year.
Plus it’s far too early to dismiss the risk of further protectionist pressure on the USD – especially under a US administration which clearly desires a weaker currency.
We modestly raise our USD forecasts for the summer, but remain convinced that by the end of the year – and into 2019 – structural forces will drive the dollar to levels weaker than where it currently trades today.
ING’s revised forecasts for major currency pairs – May 2018