Currencies | Feb 18 2011
– Relative rates to drive forex markets in 2011
– ECB expected to hike before the Fed
– Euro likely to gain on US dollar this year
By Chris Shaw
In the view of Danske Bank, the single most important factor for foreign exchange markets in 2011 will be relative interest rates.
This supports the bank's view the euro is likely to gain against the US dollar, as it suggests with the euro now less vulnerable to sovereign debt concerns the potential for the European Central Bank (ECB) to begin tightening monetary policy before the US Federal Reserve does will act in the euro's favour.
Danske Bank is forecasting the ECB will begin to tighten rates in the final quarter of this year, reflecting a focus on headline inflation. This is being boosted at present by high commodity prices.
At the same time Danske Bank suggests the market is currently far too hawkish on potential Fed moves, as it expects the Fed's focus will instead be on high unemployment and low core inflation. This implies no rate hikes in 2011, with Danske Bank noting the market currently expects the first rate increase by the Fed to come in January of 2012.
To reflect this view Danske Bank has brought forward its timetable for euro gains and now forecasts a EUR/USD rate of 1.38 in three month's time and 1.42 in six month's time, which compares to a previous forecasts of 1.35 and 1.38 respectively. On a 12-month view there is no change to the bank's EUR/USD forecast of 1.45.
Against the Japanese yen Danske Bank expects the US dollar to perform better, as a reconnection with relative interest rates suggests significant upside in the USD/JPY pair. On a three-month basis Danske Bank is forecasting a USD/JPY rate of 85, rising to 87 on a six-month time frame and to 90 on a 12-month basis.
Relative rates should also offer support to the euro against the yen and Danske Bank expects the EUR/JPY rate to hit 130 on a 12-month basis. This compares to a current rate of around 113.5.
For the euro against the British pound, Danske Bank sees the Bank of England (BoE) moving on rates earlier than the ECB with a rate hike forecast before August. So while short-term the pound could come under pressure, pushing the EUR/GBP rate to 0.86 on a three-month basis, Danske Bank expects as UK rates are lifted later this year this rate is likely to drift back towards the 0.84 level.
