USD and Scandies remain strategically vulnerable

Receding trade and geopolitical risks, focus back on data

Since our last FX Forecast Update on 22 July, global markets have remained upbeat, with global equities performing well, supported by solid economic data, positive earnings surprises, and fading trade and geopolitical risks. Despite the headlines, markets have shifted back to trading on fundamentals. Credit spreads remain tight, while front-end US rates have moved lower as markets increasingly price a resumption of Fed cuts. This in turn has kept the broad USD under pressure so far in August, with GBP, SEK, and EUR standing out as the top G10 performers, although movements have been relatively limited.

After a strong July for the broad USD, the tide has turned in August amid mounting evidence of a slowing US economy. Beyond the late-July dip in EUR/USD following a hawkish FOMC, EUR/USD has traded rangebound between 1.16 and 1.18, with attention firmly back on US data. The Scandies have been relatively stable against the EUR over the past month, though NOK has edged modestly lower in line with weaker oil prices and tighter rate spreads versus peers. Meanwhile, EUR/GBP has drifted lower in August following the BoE's hawkish 25bp cut. CHF, by contrast, has underperformed on the back of the 39% US tariff on Switzerland, with EUR/CHF climbing above 0.94.

Outlook: Positive on EUR/USD, negative on Scandies

We continue to see EUR/USD on an upward trajectory, targeting 1.23 on a 12M horizon, underpinned by relative rates, a recovering European asset market, and the reduced global need for contractionary policy. In addition, the gradual adjustment of hedge ratios on USD assets and diminished confidence in US institutions should remain structural tailwinds for EUR/USD. For SEK, we do not expect relative monetary policy to provide sustained support; instead, the low growth-high inflation mix is likely to remain a headwind through H2 2025. For EUR/NOK, we maintain an upward sloping forecast profile. We stress that longer-term drivers such as relative real rates, the relative attractiveness of asset markets, and global monetary conditions still pointing to a higher EUR/NOK over time.

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 hit, EUR/USD could break substantially higher than our forecast suggests. In this environment, commodity currencies would also face a larger hit. Conversely, persistent resilient US data could keep the USD stronger-for-longer. We highlight that a stagflationary shock to the US economy might not necessarily be positive for the USD - even if the Fed refrains from cutting rates (or delivers hikes) - as the US investment case in such scenario would suffer.

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