February 2023 - Monthly Economic Outlook

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

Time for a pause?

At the start of this year, the key question is when will central banks pause their rate-tightening cycle? A minority have already announced one (the Bank of Canada and the Bank of England) and the others are likely to follow by the summer. But this does not mean the battle against high inflation is over. As Jerome Powell, the president of the US Federal Reserve (Fed), underlined last week, central banks tend to announce their victory against inflation prematurely. Vigilance is the watchword. In our view, this means that interest rates will remain high for an extended period and that expectations of policy rate cuts that took hold in the market in the second half of last year are clearly mistaken. A high interest-rate environment is set to prevail for a long time yet (implying more restrictive financial conditions). 

EUR/USD
High: 1.1002  Low: 1.0515 Variation: +1.77%

The EUR/USD staged a strong rally in January. This was due to the fact that there was more good news than bad about the eurozone’s economic trajectory. In the end, the much-feared recession failed to emerge. The energy crisis is also more benign than expected. On the monetary front, the European Central Bank (ECB) will likely announce another 50 basis-point rate increase next March (there is no meeting in February) before deciding on the interest-rate trajectory. The Fed is taking a similar approach. The sole difference is that its rate hike will be smaller (25 basis points). In the short term, monetary policy is unlikely to be a highly differentiating factor for the direction of the EUR/USD. We are still bullish on the pair. But new catalysts will be needed in February for it to extend its run above 1.10. 

EUR/GBP
High: 0.8980 Low: 0.8734 Variation: +1.81%

The EUR/GBP is one of the currency pairs we have the fewest doubts about regarding its trajectory in the short and medium term. A rally is the most likely outcome. The next target is a sustained run above 0.90. The long recession expected in the UK (five quarters on the Bank of England’s estimates), coupled with the acute energy crisis, are set to plunge the UK into a prolonged downturn. There is no need to mention Brexit among the causes of the UK economy’s ailments. We forecast profit taking on the EUR/GBP pair, in particular after its excellent performance last week. But the trend remains upward, in our view.  

EUR/JPY
High: 142.86  Low: 138.17  Variation: +0.81%

The EUR/JPY pair had a roller-coaster ride in January. The market had forecast a tightening of Japanese monetary policy (because of soaring inflation), but this failed to materialise. This explains the resurgence of volatility. The change in the Japanese central bank governor next April will probably be an opportunity for a strategic monetary policy review (inevitably leaving the door open to an exit from negative policy rates). We do not think market expectations were erroneous. It is more that the timing was incorrect. In time, this should encourage investors to return to the JPY.

EUR/CHF
High: 1.0086  Low: 0.9828 Variation: +1.35%

The EUR/CHF pair has been fairly stable for several days, hovering around parity. The euro’s rise is simply due to the fact that there was more good news than bad about the EU’s economic trajectory at the start of this year. This has led to a repositioning of investors, who are now long (buyers of) the euro. That said, we doubt this rally against the Swiss franc will continue. The Swiss currency should perform well this year. We expect the Swiss National Bank to maintain a hawkish tone (in favour of monetary tightening) for some time, since concerns about high inflation have mounted.

EUR/CAD
High: 1.4643  Low: 1.4270  Variation: +1.17%

The EUR/CAD had a roller-coaster ride in January. But the euro seems to have gained fresh momentum. Good economic data in the eurozone (a surprise for many analysts) is an upward factor for the currency, even if this is now likely to wane. Added to this is the Bank of Canada’s monetary policy pause, a downward factor for the CAD (the terminal rate has now been set at 4.5% after an eighth and final consecutive hike of 25 basis points). It is not impossible that the EUR/CAD will return to its annual highs around the zone of 1.4600. 

EUR/AUD
High: 1,5979 Low: 1.5307 Variation: +2.21%

The Reserve Bank of Australia will probably be the next central bank to announce a monetary policy pause this week (after a final rate rise of 25 basis points). Inflationary pressures have eased in recent months and growth is slowing (especially in the real estate sector). Since this decision is already largely priced in by the currency markets, it should not cause much volatility on AUD pairs, in our view. In the medium term, the scale of China’s reopening will probably be the principal driver of the AUD – far more than any shift in monetary policy in Australia or the eurozone.

EUR/CNH
High: 7.4037 Low: 7.2028 Variation: +0.63%

The EUR/CNH pair has performed more or less in line with our expectations. The lack of a recession in the eurozone has led to a repositioning by investors in the euro (as buyers). Added to this is the underlying depreciation of the CNH. This partly reflects China’s ambition to devalue its currency to stimulate its economy, which is emerging from a long period of lethargy. We continue to be bullish on this pair in the medium term. The state of play should not fundamentally change in the coming months.

EUR/HUF
High: 401.09 Low: 384.64 Variation: -1.87%

If 2022 was a terrible year for the forint, 2023 is set to mark a renaissance. The Hungarian currency has had an impressive start to the year (it is one of the best performers among emerging currencies). Several factors are set to continue driving an appreciation of the forint: the rise in the EUR/USD pair (which has positive repercussions on the HUF), risk appetite in the forex market (linked to the absence of recession), receding tensions on the geopolitical front, the Hungarian central bank’s still hawkish tone and an inevitable improvement in relations between Budapest and Brussels. Investors are now predominantly positioned as buyers of the HUF. While the currency will certain not be able to escape profit taking, we remain convinced at Ibanfirst that this will turn out to be a very positive year for the Hungarian currency.

USD/HUF
High: 379.81 Low: 351.03 Variation: -3.58%

At the publication of our forex forecasts for 2023, we reiterated that the first quarter of 2023 may be a period of underperformance for the US dollar. This has already been proven against the HUF. The USD/HUF lost more ground in January (-3.58%) and this is surely just the beginning. Besides the aforementioned support factors for the HUF (or even the EUR/HUF pair), it should also be kept in mind that the dollar is penalised by the global repositioning of investors at the start of the year as they shun safe havens (i.e. everything denominated in USD) and move into instruments perceived as being more risky (in particular European assets). The direction of financial flows, which are leaving the dollar zone and heading into Europe, is also a fundamental trend explaining the weak performance of the USD/HUF at the start of this year.

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