Investment Bank Crédit Agricole exchange rate forecasts
- Eurozone optimism will support the outlook for the euro.
- The global recovery will dampen support for the US dollar, especially given deficit issues.
- EUR / USD will trade at 1.20 or higher with an advance to 1.24 by the end of 2022.
- GBP / USD is expected to rise slightly from 1.41 to 1.45 today by the end of 2022.
- The Canadian dollar is now slightly overvalued.
Eurozone optimism will increase
After the initial weakness, Crédit Agricole expects the euro / dollar (EUR / USD) exchange rate to strengthen over the next few months, but its reasoning is slightly different from that of many other banks.
In the short term, the bank expects the EUR / USD to fall; “The eurozone is expected to recover but the ECB could push back any unwarranted tightening of the bloc’s financial conditions, keeping the euro an attractive funding currency.”
However, he expects support close to 1.2000.
Longer term, the bank expects EUR / USD to strengthen. This partly reflects confidence in the outlook for the euro area.
“We remain more constructive on the euro in the long term as it is likely to benefit from a further upturn in global growth and trade.”
The bank also notes that the potential of the EU stimulus fund will support growth while AAA-rated bonds may attract capital from investors looking to diversify away from the US dollar.
Crédit Agricole expects the Federal Reserve to tighten its monetary policy. This may be a necessary condition for the dollar to strengthen, but potentially not enough.
He notes; “The US dollar is the ultimate countercyclical currency and may come under pressure as global growth and global trade recover.”
Crédit Agricole also notes that higher US tax rates will threaten sentiment; “Combined with lingering concerns about twin US deficits and the overvaluation of the USD, this could encourage further diversification out of the USD in the long run.”
Pound sterling at short-term peak
The bank has slightly improved its short-term outlook for the British pound, but remains skeptical that the British pound could extend its gains, at least in the short term.
“We doubt the recent GBP gains can continue, especially given the downside risks ahead.”
Credit Agricole also doubts the Bank of England’s policy change despite some hawkish rhetoric from individual members, with the governor surrounding Bailey maintaining a cautious stance; “We therefore doubt that the recent comments could be a game-changer for the GBP.”
The bank expects strong Australian and New Zealand dollar buys if it falls, although the Canadian dollar now looks overvalued in the near term.
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Above: Table of Crédit Agricole currency forecasts covering the period 2021-2022.