Global H2-22 Outlook – Near the tipping point
At a Glance
The desk believes that the market's shift from inflation concerns to recession fears will create volatility in FX markets, particularly impacting risk-sensitive currencies. Per the full note from Standard Chartered, the growing downside risks to growth are now a focal point for investors, suggesting a potential recalibration of positions. This transition is underscored by recent economic indicators showing a slowdown in growth forecasts. With our consensus target for EUR/USD at 1.075, the market is poised for significant movements as traders navigate these conflicting narratives.
Full Analysis
What the desk is arguing
The desk posits that the evolving narrative from inflationary pressures to recessionary concerns will lead to increased volatility in FX markets. Per the full note from Standard Chartered, this shift is prompting investors to reassess their strategies amidst conflicting economic signals. The implications for risk-sensitive currencies could be profound as traders grapple with the potential for a downturn in economic activity.
Supporting this view, recent data has shown a notable decline in growth forecasts, with analysts now anticipating a more pronounced risk of recession. This shift in sentiment is likely to influence currency valuations, particularly for those currencies closely tied to economic performance. As inflationary pressures ease, the focus will increasingly shift to how central banks respond to these changing dynamics.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which sees a stronger euro in the near term, while bofa presents a more cautious outlook, suggesting divergence in expectations among market participants. The desk's call is positioned at the upper bound of the consensus range, indicating a more optimistic view on the euro's resilience against recession fears.
How other firms see it
Several firms, including jpmorgan and citi, are aligned with our view, anticipating a potential strengthening of the euro as recession fears mount. Conversely, bofa and deutsche express skepticism, forecasting a weaker euro amid persistent economic challenges.
In this context, the EUR/USD trajectory will be closely tied to the ECB's policy decisions and the evolving economic landscape. Traders should also monitor the USD/JPY pair for potential spillover effects, as shifts in risk sentiment could drive movements across these correlated currencies.
What the calendar says
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From the original
In the first half of the year, markets focused on upside risks to inflation. This is now shifting to include downside risks to growth and recession forecasts. How do investors and businesses navigate the almost conflicting narratives between inflation and recession? Find out in t
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