An investment bank, JP Morgan has released an update on the exchange rate forecasts for 2022-2023.
The investment bank considered certain indices in providing these forecasts, which include:
- Rapid Fed rate hikes and global stagflation in the global economy due to the Russian-Ukraine war that has disrupted the global supply chain. JP Morgan hereby predicts that this economic condition will boost the dollar with USD/JPY above 130.
- Bank of England rate hikes are predicted not to support the pounds sterling given the stagflation risks associated with the supply chain disruption arising from the European ban on Russia.
- The Bank predicts that commodity currencies will make limited net gains as the EUR/USD is to weaken to 1.05 on a 3-month view before a recovery to 1.10 in 12 months.
- Due to the Eurozone economic vulnerability, the Europe Central Bank (ECB) rates will not strengthen the Euro.
- However, EUR/GBP is expected to trade in a 0.83-0.84 range according to the Bank.
JP Morgan’s Prediction of the US Dollar (USD) in Global Pole Position
JP Morgan expects that the Federal Reserve will approve a string of interest rate hikes that will support the US dollar, especially in relative terms.
The bank reported, “We expect the US to hike 225 basis points this year, matched with the magnitude by the Bank of Canada. At the least, this should boost the US yield levels as the Fed approaches neutral, particularly as other central banking peers are beginning to show greater concerns around their future growth outlooks.”
The bank expects that the dollar will benefit from the global stagflation fears as the global economy faces important challenges.
Here is the analysis:
First, the Bank expects interest rate hikes will damage economic growth and undermine the currency strength.
It then expects that the net change in terms of trade will underpin the dollar while traditional defensive currencies such as the yen will struggle to gain sustained support if there are adverse yield spreads.
In totality, the Bank expects that the net effect is to raise the broad-dollar forecasts by an average of 1.5% across the forecast horizon.
How the Ukraine War will hit the Euro rates (EUR)
Based on JP Morgan’s prediction of an increased interest rate, it expects that this action will rebut the strength of the Euro.
The statement by the bank read, “Our new call is for an ECB hike in July meeting, but since this is motivated by higher inflation and despite softer growth, we don’t view this as a supportive factor for EUR/USD.”
Thus, the Bank expects that the Euro will remain vulnerable to downward pressure, while it predicts that the Euro to Dollar exchange rate will be about 1.05 on a 3-month view.
However, the Bank expects that a low point will potentially be seen during the third quarter of 2022. Meanwhile, the Bank raised its year-end dollar to Yen (USD/JPY) forecast to 133.
It expects the global inflation differentials will underpin the Swiss currency. “The inflation unleashed by the Ukraine invasion and before the post-covid re-opening is fundamentally bullish for CHF.”
Economic Vulnerability May Hamper the Pounds Sterling
JP Morgan maintains a negative stance on the UK currency on fundamentals ground with downward pressure on growth and upward pressure on inflation.
The bank says that stagflationary pressures are more acute in the UK than everywhere else. Thus, it expects the Bank of England will raise the rates to 2.50% at the end of 2023, as compared to the market expectations of 2.75%.
JP Morgan also does not expect that the Bank of England rate hikes will support the UK currency.
However, it expects that the real yields will remain negative for the currency and tend towards sap support. Eventually, it expects the Pound will edge higher from current spot levels with a substantial amount of bad news priced in.
JP Morgan’s currency forecasts covering the period 2022-2023
|Pair||spot||Jun 2022||Sep 2022||Dec 2022||Mar 2023|