G10 FX Talking: Dollar stronger for longer

Articles G10 FX Talking: Dollar stronger for longer 08:18 FX Talking Norway Sweden Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Despite all the talk of de-dollarisation last year, there’s been no follow-through selling. Importantly, investors now think the Federal Reserve will be in a position to tighten policy rates as the labour market stabilises and inflation moves further away from the Fed's 2% target. We think the dollar can hold recent gains this summer Chris Turner and Francesco Pesole Dollar dominance: supported by higher-for-longer US rates and renewed confidence in Fed tightening EUR/USD: Riding out Fed hawkishness Spot One month bias 1M 3M 6M 12M EUR/USD 1.16 Mildly Bearish 1.15 1.15 1.17 1.20 It looks like FX markets are entering a period where the dollar will be back in demand.

Our house call is that energy prices will remain high or rise further into July as inventory drawdown strategies are questioned. This inflation shock will be with us for longer. With a stable labour market, the Federal Reserve will have to delay its easing cycle deep into 2027.

Bearish flattening of the yield curve means cyclical dollar strength should be with us through the summer. Having already hiked to 2.25%, we expect another hike from the European Central Bank either in July or September. But the stagflationary shock will be felt more in the eurozone than in the US.

EUR/USD could be pushed to 1.13/14 in July – but this is not 2022. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts USD/JPY: Decreasing marginal returns of intervention Spot One month bias 1M 3M 6M 12M USD/JPY 160.10 Neutral 160.00 160.00 158.00 154.00 The $70bn of FX sales undertaken by the Bank of Japan in late April/early May only bought Tokyo a little time. Japanese authorities appreciate that the dollar is bid, yen real rates are deeply negative, and the speculative market is not especially short yen.

There’s also the issue that too frequent interventions (more than three times over a six-month period) could see Japan lose its ‘freely floating’ IMF currency regime designation. All this points to USD/JPY staying bid this summer and potentially advancing into the 162/163 area. What would be a game-changer, albeit unlikely, is the US Treasury engaging in joint intervention.

The Fed did check USD/JPY rates in January. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts GBP/USD: Sluggish BoE, UK politics to weigh Spot One month bias 1M 3M 6M 12M 1.34 Mildly Bearish 1.32 1.31 1.33 1.35 Our team has recently revised the Bank of England call to look for one 25bp hike in July (to 4.00%) and then three cuts from 2Q27 onwards. One hike will probably not be enough to deliver strong support for the pound in what should be a strong-dollar environment this summer.

Look out for politics to heat up around 18 June, when PM Keir Starmer’s rival, Andy Burnham, looks set to win a by-election. Victory would see him formally challenge Starmer. Burnham becoming PM would mark a clear shift to the left in UK politics.

That said, GBP has been proving resilient this year. Cheap valuations and £200bn of UK-targeted M&A could be factors. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/JPY: Slight downside bias emerging Spot One month bias 1M 3M 6M 12M EUR/JPY 185.38 Mildly Bearish 184.00 184.00 185.00 185.00 EUR/JPY has been remarkably stable, near 185, over recent months.

If we are right with a big spike in energy over the next four to six weeks, both the euro and the yen should come under pressure. But we see more downside for EUR/USD than upside for USD/JPY. This is because the Japanese will probably try to intervene again in the 161/162 region.

Domestically, the Bank of Japan may well hike at the 16 June meeting and the market is pricing close to a second hike by December. Investors will be focused on the friction between the BoJ and the government. Any pressure against rate hikes could hit the yen.

A big tech sell-off is one of the downside risks to EUR/JPY. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/GBP: Exceptionally low volatility Spot One month bias 1M 3M 6M 12M EUR/GBP 0.86 Mildly Bullish 0.87 0.88 0.88 0.89 EUR/GBP volatility (both traded and realised) remains exceptionally low. There is a slight kink in the volatility curve around the one- to two-week term, which probably reflects the unrest surrounding the Makerfield by-election on 18 June.

From what we can see, strong EUR/GBP support should hold around the 0.8600/8610 area, and we favour a bounce back to 0.87 on the view that Andy Burnham will oust PM Starmer and that the BoE will lag ECB tightening this summer. The near-term risk is that we see a repeat of March’s price action. A spike in energy saw the market price more BoE than ECB rate hikes and EUR/GBP came under pressure.

Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/CHF: Unwind of the dollar debasement hurts CHF Spot One month bias 1M 3M 6M 12M EUR/CHF 0.92 Neutral 0.92 0.92 0.92 0.92 The shift in market pricing towards Fed tightening has weighed on the Swiss franc through two channels. The first is the unwinding of the dollar debasement trade. This has seen the franc, gold and bitcoin all come under pressure on the view that the Fed is not ‘captured’ after all and could end up hiking.

The second channel is through more conventional rate spreads, where the ECB is tightening and the Swiss National Bank will lag. Two-year EUR:CHF swap differentials have widened to 270bp. However, it’s not clear how much further widening can be expected.

SNB FX intervention data on 30 June should show the largest FX buying since 2020/21 and keep EUR/CHF downside limited. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/SEK: Riksbank hike hinges on the krona Spot One month bias 1M 3M 6M 12M EUR/SEK 10.93 Mildly Bullish 11.00 10.90 10.70 10.60 We are revising our EUR/SEK profile moderately higher, in line with a more bullish view on oil and a call for two ECB hikes. We still think markets are overestimating the chance of a Riksbank hike.

Inflation is still below target, and the pass-through from higher oil prices is smaller and slower in Sweden than in the eurozone. Still, the risks of a hike have increased somewhat. In our view, a realistic trigger could be a sharp weakening of the krona.

The Riksbank might try to contain it by hiking rates to avoid spillover into inflation expectations. That may not happen until EUR/SEK hits 11.10-11.15, which is not our current base case. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/NOK: Ready to benefit from new oil rallies Spot One month bias 1M 3M 6M 12M EUR/NOK 11.05 Mildly Bearish 10.90 10.80 10.60 10.60 We are pencilling in another Norges Bank 25bp hike this year, contingent on an increase in oil prices this summer.

That would further enhance the krone’s already attractive carry, though the currency will likely need a broader stabilisation in global risk before those advantages can fully register. A Brent price above $110/bbl, as forecast by our commodities team, should drive EUR/NOK lower, net of any short-lived corrections in risk sentiment. The main risks for NOK in this scenario are related to bigger equity corrections and/or the Fed hiking more than once.

Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts EUR/DKK: Still tolerated at these high levels Spot One month bias 1M 3M 6M 12M EUR/DKK 7.47 Neutral 7.47 7.46 7.46 7.46 The Danish central bank continues to show tolerance for the relatively strong EUR/DKK, choosing not to intervene to buy DKK again in May and hiking 25bp like the ECB on 11 June. We still think we are close to a tipping point in EUR/DKK strength to trigger new FX intervention or action on the rates side to close the policy gap with the ECB. Our view, therefore, remains that EUR/DKK will stay close to the 7.470 mark in the second half of the year.

Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts USD/CAD: CAD in an undesirable spot near term Spot One month bias 1M 3M 6M 12M USD/CAD 1.40 Neutral 1.40 1.39 1.37 1.33 Idiosyncratic risks have continued to weigh on Canada’s dollar. The labour market rebounded in May, but the April jobs slump, paired with a technical recession, has left Bank of Canada officials a bit more cautious on tightening. We don't expect a hike.

USMCA renegotiations may well be the next big thing on President Trump's agenda. It's still unclear how those will be dealt with alongside Iran negotiations and the World Cup. But trade tensions remain an important driver of uncertainty for Canadian businesses.

Higher oil prices can partly offset those domestic woes for CAD in the crosses, but not in USD/CAD. We now expect it to break above 1.40 before gradually easing back towards 1.37 in the second half of 2026. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts AUD/USD: More short-term turbulence possible Spot One month bias 1M 3M 6M 12M AUD/USD 0.70 Neutral 0.70 0.71 0.73 0.73 The likelihood of another rate hike by the Reserve Bank of Australia would rise, especially in a potentially rocky summer for energy markets.

The Bank might have a slightly higher bar to tighten again, but it has shown little hesitation to act if data heats up. The positive impact on AUD/USD from another RBA hike would, however, be more than offset by potential Fed tightening, which tends to have a deeper impact on high-beta currencies than domestic stories. Beyond a potentially turbulent summer, we remain optimistic on AUD's outlook.

Carry and terms-of-trade improvements are pointing higher. If risk sentiment holds, AUD should emerge as an outperformer again later this year. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts NZD/USD: Hikes fully priced in Spot One month bias 1M 3M 6M 12M NZD/USD 0.58 Neutral 0.58 0.59 0.60 0.61 The Reserve Bank of New Zealand should start hiking rates on 8 July after a strongly dissented hold in May.

If oil prices spike over the next few weeks, we see a chance of a 50 bp increase in July. Even if the hike is only 25bp, the messaging may well need to remain hawkish to avoid a rates repricing that could push inflation expectations higher. Markets are pricing in 75bp of RBNZ hikes by year-end; our call is 50bp, with hawkish risks.

Still, we expect the Fed story to be a bigger driver for NZD/USD. We are still looking at some upside for the pair in 2H26, but we expect AUD to outpace NZD again into year-end. Source: Refinitiv, ING Forecasts "> Source: Refinitiv, ING Forecasts Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.

The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… Francesco Pesole FX Strategist Francesco is an FX Strategist and has been with the firm since May 2019.

His main focus is on the G10 space and, in particular, on European and commodity currencies. He began his career at Credit…