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Crucially, our team expects the Bank to keep the policy rate there until late 2024. We expect the ECB to hike the policy rate by 125bp into 2Q23, taking the deposit rate to 3.25%. The European Central Bank's hawkish pivot in December also has some critical implications for the euro. That's still high but way below the EUR250-300/MWh levels seen last summer. This could limit the bounce in natural gas in 2H23 towards the EUR140-160/MWh area. Our commodities team is now looking at a much lower profile for natural gas, where Europe could exit the heating season with storage above 50% full. The negative terms of trade shock that had been so bearish for the euro last summer has now completely reversed. On Europe, the surprisingly warm winter has seen natural gas prices plummet. There are growing signs the Fed has both motive and means to respond with an easing cycle later this year

Reflationary Fed policy is a dollar negative. Forecasting the US economy to contract in the second half of this year, our US economist James Knightley predicts a deeper than consensus 250bp easing cycle from the Fed starting in the third quarter. This gives the Fed the motive and the means to respond with an easing cycle later this year. Since we published that outlook, there have been clear signs of decelerating US price pressures, and it also looks like the US economy heading toward a recession. Instead, the year is shaping up a little better than most had imagined. Those inputs were:īack then, we sided with a more negative set of outcomes and felt that EUR/USD could end 2023 near parity. In it, we presented a scenario analysis and argued that the permutations of four major inputs would determine where EUR/USD would trade in 2023. We undertook our last major FX forecast round with the release of our 2023 FX Outlook, ‘ The dollar’s high-wire act’.

The same can be said for foreign exchange strategists making FX forecasts. To quote a former UK Prime Minister, when asked about the most significant challenges faced by his administration, the answer came: “Events, dear boy, events”.