Still too soon to call a EURUSD bottom

Key highlights

• We keep a three month target for EURUSD at 0.98. Some short-term EURUSD consolidation is possible within a 0.96-1.00 range into year-end, given significant progress on topping up seasonal energy stockpiles and the potential for a warmer winter
• That said, we lower our 12-month target to 0.93. Medium term fundamentals remain bearish, with the energy shock likely to be a story for 2023 as well. Positioning is still relatively neutral and global liquidity is likely to tighten until at least Q2 2023
• We maintain our positive CHF view, with the Swiss National Bank increasingly likely to ensure a stronger currency to temper imported inflation
• For sterling, the three-month outlook is evenly balanced, but we remain negative on a 12-month view. EURGBP could oscillate in a 0.8550–0.8850 range into year-end, but we pencil in the pair approaching 0.90 on a 12-month view, with risks skewed higher
• We no longer expect the Bank of Japan to pivot in a more hawkish direction before spring 2023. Hence, USDJPY has the potential to overshoot further. However, we believe the JPY could recover in H2 2023, and keep a neutral bias on the yen
• With the narrative likely shifting from global inflation to a global recession, both higher risk G10 currencies and Asian currencies could see relative underperformance.

We have emphasised two main drivers underpinning our broad US dollar view year-to-date: global liquidity and growth, as well as the terms of trade shock facing many countries in Europe and Asia. Our base case is that global liquidity will continue to tighten until the second quarter of 2023, supporting the dollar. At that point, if global central banks pivot from a hawkish to a more neutral or dovish stance, and China sees more convincing signs of an economic re-opening, the dollar could see some weakness.

That said, anticipating a large reversal lower for the dollar in 2023 is challenging with the US’s terms of trade advantage holding at multi-decade highs. While several European and Asian economies have suffered from the impact of the Russia-Ukraine conflict and related sanctions, the US has benefited. The US trade deficit has narrowed, just as external balances in many European and Asian countries continue to decline.

While central banks have intervened in either currency or bond markets, we believe a coordinated intervention to weaken the US dollar is still far away. USD valuation is still not as extreme as during prior periods of coordinated FX intervention. Moreover, US inflation must fall to allow the Fed to turn neutral.

Taken together, we lower our 12-month target on EURUSD to 0.93, and expect a 0.96–1.00 range to hold until the year-end as markets eye short-term positives from adequate winter energy supplies and a potentially warmer winter. That said, as the global narrative shifts from inflation to recession (with a potentially delayed China reopening), we believe several higher-risk G10 and Asian currencies could underperform even the euro going forward.