Exchange rate forecasts for the next 6 to 12 months: May 2022 update

  • ING Investment Bank Foreign Exchange Rate Forecast 2022-2023 – May 2022 update
  • A series of Fed rate hikes will support the US dollar over the next few months.
  • The tightening of global financial conditions should also support the US currency.
  • The EUR/USD vulnerable to a questioning of the parity before a recovery limited to 1.10 in 12 months.
  • The pound will be more vulnerable, especially with BoE rate hike expectations still too high.
  • GBP/USD will trade below 1.30 for the next 12 months.
  • Commodity currencies are gaining ground over the medium term.

US dollar support due to tighter financial conditions

ING notes that global financial markets are feeling the pressure from the Fed’s aggressive rate hikes, while global growth is being undermined by tensions in China and Europe.

bannerAccording to ING; “This is clearly a bullish environment for the dollar – a currency that tends to be inversely correlated to the global growth cycle.”

The bank does not expect a significant improvement in conditions over the next few months and adds; “In what should be a difficult time for equity and credit markets, we expect the dollar to remain strong this summer.”

Overall, ING expects weaker global growth conditions to also tend to weaken the Euro.

ING also expects underlying volatility in foreign exchange markets to remain higher, particularly with concerns that globalization is facing major challenges and uncertainty.

EUR/USD Parity Test on Charts

Regarding developments in the US, ING expects Fed tightening to boost the US Dollar on yield grounds.

He notes that US short-term rates could reach 3.00% by the end of 2022 and adds; “Real U.S. 10-year interest rates have turned sustainably positive for the first time since 2019. They could well rise another 75 to 100 basis points.”

The bank adds; “We think this means EUR/USD can trade in a fairly wide range for the rest of the year – perhaps 1.00-1.10 with a bearish bias over the next few months.”

He expects the dollar to start losing ground from the end of 2022 with EUR/USD net 12-month gains.

Regarding the yen, ING expects it to be more difficult for the exchange rate of the dollar against the yen (USD/JPY) to progress further, especially since the yen is undervalued and that the Japanese authorities are more concerned about the weakness of the currency.

He adds; “That’s not to say USD/JPY can’t push further if US Treasury yields push materially higher, but the move will be hard work.”

The exchange rate of the dollar against the yen (USD/JPY) is expected to weaken to 126.0 over 12 months.

With regard to the Swiss franc, ING expects inflation differentials to be a key element and generate pressure for gains in francs. He notes; “Unless we see an appreciation of the nominal CHF, the real exchange rate would depreciate – which is not desirable. All of this probably means that 1.00 is not a firm floor at all.

ING considers that the Chinese yuan will resist further losses.

Sterling remains vulnerable

ING remains negative on the outlook for the pound, with Bank of England expectations set to be further downgraded,” he added; “The GBP looks increasingly vulnerable as investors still peg the Bank of England discount rate above 2.00% this year.

The bank expects consumption and wage growth to be key drivers in the coming months.

Regarding the euro-pound exchange rate (EUR/GBP); it is more bearish on the pound; “We are raising our year-end EUR/GBP target to 0.86 from 0.84 and maintaining our 2023 year-end target at 0.88. There are likely upside risks to both.

The bank has lowered its forecast for the exchange rate between the pound and the dollar (GBP/USD), with the pair forecast below 1.30 over the next 12 months.

Medium-term currency gains in raw materials

ING expects the strength of the US dollar and vulnerable risk appetite to keep commodity currencies on the defensive in the near term, but it does not expect further significant losses and still sees the possibility of a significant recovery in the medium term.

ING still sees room for Canadian dollar gains given the underlying fundamentals; “With the Bank of Canada’s rapid tightening and long-term benefits from high commodity prices, we still believe USD/CAD can trade below 1.25 by 3Q22.”

The outlook for the Australian dollar is mixed with high commodity prices offset by unease over Chinese economic trends as it considers market expectations for Reserve Bank tightening to be too high.

Overall, he notes; “We continue to see moderate downside risks for the AUD (possibly at 0.68), although a gradual upward trajectory over the medium term remains our base-case scenario.”

ING expects notable 12-month gains for the New Zealand dollar.

ING also expects the Norwegian and Swedish currencies to recover in the coming months as national central banks continue to tighten policy.

Table of ING’s foreign exchange forecasts covering the period 2022-2023.

Pair place 1 month 3 months 6 months 12 months
EUR/USD 1.06 1.05 1.05 1.08 1.10
USD/JPY 130 130 130 128 126
GBP/USD 1.23 1.24 1.24 1.26 1.26
EUR/GBP 0.86 0.85 0.85 0.86 0.87
EUR/CHF 1.05 1.02 1.02 1.05 1.10
AUD/USD 0.71 0.70 0.70 0.72 0.73
USD/USD 0.63 0.64 0.65 0.68 0.71
USD/CAD 1h30 1.28 1.26 1.24 1.22
EUR/NOK 10.18 9.85 9.75 9.55 9:45 a.m.
EUR/EUR 10:60 a.m. 10:35 a.m. 10:25 a.m. 10.00 9.80
USD/CNY 6.62 6.70 6.55 6.50 6.45