Economic Outlook and currency fluctuations
The current economic situation is marked by geopolitical risks that can impact currency values. Our view is that the Euro to US Dollar (EUR/USD) exchange rate can probably correct a bit further due to these risks. We have set a near-term target of 1.140, and it’s possible that the exchange rate could go even lower without any significant increases in oil prices. However, it’s worth noting that geopolitical events usually have a temporary impact on foreign exchange (FX) rates unless they lead to long-term effects on commodity prices, such as what happened with the Russia-Ukraine war.
Impact of Geopolitical Events on Currency
Geopolitical events can lead to market volatility, causing fluctuations in currency values. However, once the situation stabilizes, investors often return to buying currencies like the Euro, especially if they believe the currency has been undervalued. This means that even if the EUR/USD exchange rate drops, it’s likely to rebound once the geopolitical tensions ease.
Upcoming Central Bank Meetings
Several central bank meetings are scheduled to take place, which can also impact currency values. The European Central Bank (ECB) President Christine Lagarde and other Governing Council members will give speeches, while central banks in Switzerland, Norway, and the UK will hold meetings to discuss interest rates.
Swiss National Bank Meeting
The Swiss National Bank is expected to cut interest rates by 25 basis points (bp) to 0% and may leave room for another reduction. Markets are anticipating this move, with 31bp priced in for the meeting and almost fully pricing in another cut by the end of the year. Although the initial reaction in the Swiss Franc (CHF) might be slightly positive, the expectation of negative rates could limit gains.
Norges Bank Meeting
In Norway, the Norges Bank is likely to keep interest rates unchanged, as markets do not expect any changes. However, some analysts argue that policymakers are taking a risk by not easing rates, and a cut in August might be necessary. The recent increase in oil prices could mean that the bank’s new projections do not signal a move before September, which is already priced in by markets. As a result, the Euro to Norwegian Krone (EUR/NOK) exchange rate might remain stable due to a still hawkish tone from the bank.
Bank of England Meeting
The Bank of England is expected to keep interest rates on hold, in line with market expectations. While there might be some dissenting votes for a rate cut, the overall guidance is likely to remain unchanged, supporting market expectations for two more cuts by the end of the year. However, the risks are slightly tilted towards a more dovish stance, given the recent weak UK economic data, which could lead to a more bullish outlook for the Euro to British Pound (EUR/GBP) exchange rate in the near term.
Conclusion
In conclusion, the current economic situation is complex, with geopolitical risks and central bank meetings affecting currency values. While the EUR/USD exchange rate might correct further due to these risks, it’s likely to rebound once tensions ease. The upcoming central bank meetings will provide more clarity on interest rates, which can also impact currency values. As always, investors should stay informed and adapt to changing market conditions to make informed decisions.
