G10 FX Talking: Time To Back The Hawkish Central Banks

(MENAFN- ING) Main ING G10 FX Forecasts

	EUR/USD	USD/JPY	GBP/USD
1M	1.17	↓	159	→	1.34	↓
3M	1.17	↓	158	→	1.33	↓
6M	1.18	↓	155	↓	1.33	↓
12M	1.20	↑	152	↓	1.33	↓

	EUR/GBP	EUR/CHF	USD/CAD
1M	0.87	→	0.92	→	1.36	↓
3M	0.88	↑	0.92	→	1.37	→
6M	0.89	↑	0.92	↑	1.35	↓
12M	0.90	↑	0.92	↑	1.34	↓

EUR/USD: Supported under the baseline scenario

Spot	One month bias	1M	3M	6M	12M
EUR/USD 1.18	Neutral	1.17	1.17	1.18	1.20

Investors are taking the view that a sustainable Middle East ceasefire will be forthcoming as President Trump keeps one eye on domestic approval ratings and the Iranian leadership looks to the future. With energy prices not fully retreating, higher headline inflation is baked in, although central banks will react differently depending on their starting points. We look for a 25bp ECB hike in June, while we think the Fed can resist the temptation to hike and will still be able to cut rates twice later this year. Modelling oil prices, rate differentials and a benign equity outlook gives us steady to higher EUR/USD forecasts this year. De-dollarisation remains a threat, but evidence is scant so far.

USD/JPY: Bank of Japan rate hikes to strengthen resistance at 160

Spot	One month bias	1M	3M	6M	12M
USD/JPY 159.00	Neutral	159.00	158.00	155.00	152.00

As in 2022, the energy shock has hit the yen. However, the scale of today's terms of trade shock is only a fraction of what was seen back then. This allows Tokyo to keep talking tough about USD/JPY near 160. That tough talk, however, needs to be backed up with either intervention or rate hikes. In our view, the market is under-pricing the chance of a 25bp BoJ rate hike on 28 April, where tight labour markets and strong wages worry the BoJ. A rate hike and an undervalued yen should be enough to see 160 largely remain intact, but it's too early to expect a big drop. Two Fed rate cuts later in the year should drag USD/JPY lower – also look out for Kevin Warsh confirmation testimony on 21 April.

GBP/USD: Sticking to the unchanged Bank of England rate call

Spot	One month bias	1M	3M	6M	12M
GBP/USD 1.35	Neutral	1.34	1.33	1.33	1.33

Cable has rebounded alongside EUR/USD as traders jump to reprice Middle East risk. The initial market view that the BoE would have to tighten more sharply than the ECB has proved wrong, with current pricing showing 51bp of ECB rate hikes versus 33bp for the BoE this year. Given our call for unchanged BoE rates this year, sterling could suffer. In reality, that re-pricing may not emerge until the 18 June BoE meeting. Until then, GBP/USD probably bounces around in a 1.33-1.36 range, driven by Middle East headline risk. There is focus of the Labour government pivoting towards Europe again – yet no tangible impact on activity or GBP is expected.

EUR/JPY: Still going

Spot	One month bias	1M	3M	6M	12M
EUR/JPY 187.00	Mildly Bearish	186.00	185.00	183.00	182.00

After a contained couple of months, EUR/JPY is pushing higher again. The incredibly resilient pro-risk environment continues to favour the more cyclical euro than the yen. It remains hard to stand in the way of this trend, although Japanese intervention or a BoJ rate hike could see some independent JPY strength. From the euro side, the ECB needs to manage the inflation risk carefully. We see a June rate hike with risk of another should core inflation surprise to the upside. That second hike could come in September and prove an upside risk to our EUR forecast. Japanese fiscal policy is a double-edged sword for the yen. New stimulus is good for activity but leaves sovereign risk fragile.

EUR/GBP: Holding on for higher levels

Spot	One month bias	1M	3M	6M	12M
EUR/GBP 0.87	Neutral	0.87	0.88	0.89	0.90

EUR/GBP is edging higher after heavy position-adjustment last month. Then, many investors had been long gilts and short sterling on the view that inflation would allow the BoE to cut more deeply. The energy shock upended all that. Still, UK activity is not as strong as it looks and ECB tightening versus an unchanged BoE should drag EUR/GBP toward 0.88 this summer. Equally, the eurozone should enjoy some fiscal stimulus, whereas UK fiscal headroom remains constrained. Regarding fiscal, local elections in May continue to present risks to the current Labour leadership – with any new government moving to the left. 0.8600 remains pivotal support now, below which views change.

EUR/CHF: Switzerland relatively insulated to the oil shock

Spot	One month bias	1M	3M	6M	12M
EUR/CHF 0.92	Neutral	0.92	0.92	0.92	0.92

EUR/CHF trading below 0.90 in March and the real, trade-weighted CHF trading at 120 (highest since 2015) clearly hit a raw nerve at the Swiss National Bank. It has probably been intervening over the past four weeks – potentially in the region of CHF5-10bn. That will not be confirmed until FX intervention data is released on 30 June. However, we do not think the SNB needs to chase CHF lower. Monetary policy is still described as expansionary, real estate is well bid and Switzerland's lower energy intensity in manufacturing means that growth prospects have not been hit too hard. Growth is still forecast to improve in 2026 and 2027. More aggressive ECB rate hikes than forecast could see 0.95 here.

EUR/SEK: Revising profile slightly higher

Spot	One month bias	1M	3M	6M	12M
EUR/SEK 10.82	Mildly Bearish	10.75	10.70	10.65	10.60

Risk sentiment turmoil in early-April brought EUR/SEK briefly above 11.00, with the pair now stabilising around 10.80-10.85, broadly in line with our short-term fair value estimate. Further de-escalation can bring EUR/SEK back to the 10.70-10.75 area on the back of risk-on moves. But the pair will be left with a slightly stronger outlook compared to pre-war. We have revised our year-end target from 10.50 to 10.60. We don't expect a hike in Sweden before 1Q27, as the Riksbank looks happy to look through this temporary inflation bump. Risks are, however, for an earlier move, which is fully priced in.

EUR/NOK: Norges Bank set to hike in May

Spot	One month bias	1M	3M	6M	12M
EUR/NOK 11.04	Neutral	11.00	10.85	10.75	10.70

We are sticking to our bearish call on EUR/NOK. The way the de-escalation in the Gulf seems to be playing out is proving more positive for risk sentiment than it is negative for oil prices. A break below 11.00 remains a tangible risk by the end of the second quarter in our view. We expect a hawkish Norges Bank to help NOK. Our call is for a rate hike on 7 May (16bp priced in) as some members were ready to hike already in March and the minutes showed concerns on inflation even before the war impact. Norges Bank may well keep the door open to further rate hikes and that should keep rate differentials attractive for bearish bets on EUR/NOK, even if the ECB ends up hiking too.

EUR/DKK: Thinking of a bigger hike than the ECB?

Spot	One month bias	1M	3M	6M	12M
EUR/DKK 7.47	Neutral	7.47	7.47	7.46	7.46

EUR/DKK remains at the top of recent ranges, as the Danish central bank decided not to intervene again in March and rate differentials keep applying upward pressure. These are levels consistent with previous bouts of FX intervention, and we wonder whether the central bank's plan is to wait for an ECB hike and deliver a larger (e.g. 35-40bp) hike. That would surely grant more consistent support to DKK. We are still expecting a moderation back to 7.460 later this year in EUR/DKK, perhaps via interventions or rate gap changes.

USD/CAD: CAD in a desirable spot

Spot	One month bias	1M	3M	6M	12M
USD/CAD 1.37	Mildly Bearish	1.36	1.37	1.35	1.34

We are keeping a modestly downward-sloping profile for USD/CAD into year-end, primarily on the back of expected USD weakness once the Fed resumes cutting (we think in 3Q). The domestic story isn't that supportive for CAD. Higher oil prices help growth, but the Bank of Canada remains very worried about upcoming USMCA negotiations and the impact on jobs. We don't think they'll hike despite markets pricing in c.30bp by year-end. A scenario where oil lands above pre-war level but a de-escalation still allows global risk sentiment to improve can send USD/CAD back to 1.36 before USMCA risk rises.

AUD/USD: Reserve Bank of Australia set to go again in May

Spot	One month bias	1M	3M	6M	12M
AUD/USD 0.72	Neutral	0.72	0.73	0.74	0.75

We expect the RBA to hike 25bp to 4.35% in May. Officials have sounded concerned about losing control of inflation expectations, and headline CPI could touch 4.5% on the energy impact. Market pricing for May is 18bp, and 55bp by year-end. In our baseline oil scenario (Brent back below $90/bbl in 2H26), we don't expect additional hikes after May. However, we think the RBA will keep the door open for more given lingering uncertainty. A hawkish RBA, improved sentiment and only a slow decline in energy prices means our previous end of second quarter 0.72 target for AUD/USD can be reached earlier. We are also upgrading our year-end forecast to 0.75.

NZD/USD: Reserve Bank of New Zealand to delay hike

Spot	One month bias	1M	3M	6M	12M
NZD/USD 0.59	Neutral	0.59	0.59	0.60	0.61

Policy divergence and opposite exposure to energy prices have continued adding upward pressure on AUD/NZD, which is at a 13-year high. We agree with markets that the RBNZ will have to hike rates twice this year. However, Governor Breman is living up to her dovish fame and may delay it as long as possible. Markets are pricing in a move in July, but September looks a bit more realistic. NZD/USD is slightly undervalued at these levels and may emerge as an alternative to the overbought AUD in a risk-on, oil-off environment. A still dovish RBNZ at the next couple of meetings may, however, put a cap on rallies.

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