Market guide: We expect a weaker USD

Uncertainty looms amid tariff turmoil

Since our last FX Forecast Update, 21 March, the dominating theme for markets has been increased political turmoil in the US triggered by escalating trade tensions leading to mounting US recession concerns. President Trump’s signals have been mixed post Liberation Day, with a shift in focus from broadbased tariffs to specific measures against China. The policy uncertainty in the US has triggered a broad-based risk-off sentiment in markets, resulting in a sharp sell-off in equities and widening credit spreads. The Fed faces a stagflationary shock, evident by falling oil prices and inflation expectations moving higher. For Europe, the implications are more clear cut with tariffs posing as a negative demand shock leaving downside risk to growth. As a result, markets have pushed European rates significantly lower.

Over the past month, the USD has experienced a sharp decline due to elevated political uncertainty and mounting US recession concerns with EUR/USD breaking above the 1.14 mark. The risk-off environment has favoured safe-haven currencies such as the CHF and JPY. In contrast, NOK, SEK, and GBP have faced renewed pressure with the NOK being especially hard hit from lower oil prices. EUR/GBP has moved sharply higher driven by widening credit spreads amidst market uncertainty and volatility.

Outlook: Bearish on the USD and Scandies

We have turned positive on EUR/USD in both the near and medium term, targeting a gradual move toward 1.22 over a 12M horizon. In the near term, concerns about US asset confidence and a recession will support the cross. Longer term, structural challenges like US political shifts, the trade war, and capital rotation away from US assets suggest significant USD downside. We maintain an upward sloping forecast profile for EUR/NOK as the combination of a negative demand shock to Norway’s trading partners, elevated NOK real rates, lower energy prices, and elevated labour costs create an unfavourable environment for NOK FX. While the net-effect on EUR/SEK is more uncertain given opposing driving forces, such as portfolio flows out of the US, global recession perceptions, and equity pressure, we expect a flat forecast in 1-3M and a slight rise to 11.30 over the next 12 months.

Risks to our forecasts are predominantly tied to the US outlook. If the capital rotation out of US assets continues and a sharp US recession hits, EUR/USD could break substantially higher than our forecast suggests. In this environment, commodity currencies would also face a larger hit. Conversely, a potential shock or U-turn from the Trump administration could act as a USD positive although we think much of the confidence-damage to the US would not be fully unwound.

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