USD: Cycle still intact

Stronger US data

US data releases have surprised positively with notably the September nonfarm payrolls report substantially beating expectations. This marks an important shift from summer where US data releases consistently disappointed. By extension, this has led to a large repricing of the Fed monetary policy outlook with markets now expecting a considerably slower easing pace compared to just one month ago. On the contrary, the European economy is losing steam with growth momentum waning and inflation pressures easing faster than anticipated. In China, the economy continues to show underlying weakness with muted household consumption, weak industrial production and the housing crisis raging on, which has led the Chinese authorities to announce various stimulus measures. Earlier this month, oil prices gained some renewed momentum on a re-escalation of the war in the Middle East but has since then retraced the move back to just above 70 USD/bbl.

The past month, the USD has been the clear outperformer following strong economic US data leading to large repricing of the Fed with EUR/USD moving from close to 1.12 to below 1.09 over the past weeks. EUR/GBP has continued its downward trajectory breaking below the 0.83 mark for the first time since 2022 with relative UK growth outperformance being a key driver. On the other hand, the JPY has faced renewed headwinds following the sharp rise in US rates.

Outlook: Stronger USD and weaker Scandies

We hold a bearish view on EUR/USD in both the near-term and medium-term, expecting the cross to gradually decline toward 1.05 over a 12M horizon. Regardless of the outcome of the US election, our expectation of relatively stronger US growth dynamics compared to the euro area over the coming year leads us to foresee a downward trajectory for EUR/USD. We remain medium- to long-term negative on NOK on the back of weak global growth and elevated unit labour costs and think any short-term rise on a possible decision from Norges Bank to cap the size of the FX reserves will prove temporary. For the SEK, we expect a continued weak cyclical outlook, a stronger USD, and a Riksbank continuing to front run peers to remain medium-term headwinds targeting EUR/SEK at 11.60 in 6-12 months.

Risks to our forecasts primarily lie in a sharper economic downturn than what we pencil in. A much harder landing than what we pencil in would require a sharp easing of global monetary conditions, which would likely entail a much weaker USD (after an initial squeeze higher) and much weaker cyclically sensitive currencies than in our base case. In the near-term, we will closely monitor the state of the US economy and by extension the direction of US monetary policy.

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