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2023-2024 Exchange Rate Forecasts From Investment Bank Nordea

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  • 2023-2024 exchange rate forecasts from investment bank Nordea – update October 2022
  • Further Fed rate hikes and tighter financial conditions will continue to boost the dollar.
  • Despite some relief over energy prices, the Euro will still be vulnerable during the winter.
  • EUR/USD to slide to 20-year lows at 0.93 in 3 months before a slow and attempted recovery.
  • Sterling will remain vulnerable due to weak underlying fundamentals.
  • GBP/USD is expected to hold above parity and recover to trade at 1.28 at the end of 2024.
  • Commodity currencies will remain vulnerable while financial conditions continue to tighten.

Fed Needs Rates Close to 5% to Combat Inflation

Nordea expects that t will be difficult to bring US inflation under control, especially in the services sector.

bannerThe bank adds; “it looks like companies are having little trouble passing on higher costs and profit-growth have been massive over the last couple of years.”

In this context it considers that this power of pricing will probably mean that it will take some time to get inflation down to 2%.

Given the difficulties in bringing inflation under control, it expects the Federal Reserve will have to maintain a restrictive stance and engage in further significant rate hikes.

According to Nordea; “The Fed will most likely have to push the fed-funds close to 5% in order to tighten financial conditions enough for firms to slow hiring and thereby bring the labor market into better balance.”

Nordea expects that the ECB will also have to tighten monetary policy to help tackle inflation at record highs around 10.0%

It notes; “At 0.75%, the deposit rate remains much-too low, and the ECB will deliver at least two further larger increases, before it will reconsider the pace.

It expects a further 75 basis-point rate hike this month and another 50 basis-point hike in December.

Tightening Financial Conditions Still Favor the Dollar

The dollar has weakened slightly from a 20-year peak with the Euro to Dollar (EUR/USD) rallying from 20-year lows just below 0.9550, but has not regained parity.

In this context, Nordea discusses whether the US currency has peaked; “Some might wonder whether the rally for USD is finally behind us, but we don’t think so and believe this relief rally in financial markets is temporary – we have seen similar episodes many times over the past year.”

The bank expects that the restrictive Fed stance will underpin the dollar while vulnerability in the global economy and tightening financial conditions will also favor the US currency over the next few months.

According to Nordea relative economic performance will also favor the US currency; “More pain ahead for financial markets will continue to favor safe havens such as the USD. Moreover, the US economy is still resilient and will likely fare better than energy importing major economies in Europe and Asia.”

The bank does note that fears over the energy sector have eased slightly with mild conditions so far and a larger than expected build-up in gas inventories.

Gas prices have also declined to 4-month lows, but Nordea warns that there is still a high degree of uncertainty with the threat of rationing during cold winter conditions.

In this context, Nordea expects that EUR/USD will weaken further to 0.93 before an eventual recovery to 1.10 at the end of 2024.

Nordea expects that overall yield spreads will continue to undermine the yen and the dollar to yen (USD/JPY) exchange rate has not seen a peak.

It adds; “With a continued worsening of rate differentials, we see USD/JPY trading as high as 160 at times, even with the intervention from the Japanese government.”

Looking for a 2023 Turn in Exchange Rates

The bank does, however, expect that there will be noticeable change in exchange rates in 2023 which will be led by the Federal Reserve as rates peak.

It adds; “Looking ahead, next year could involve large reversals in currency markets as central banks reach their peak policy rate. A pause from the Fed will involve markets increasingly looking towards eventual rate cuts, which in turn should lead to the dollar giving back gains against most other currencies, including the euro.”

Sterling Still on the Ropes

Nordea notes that markets are in no mood for controversial economic policies at a time when global financial conditions are tightening.

It adds; “In the United Kingdom we have had a perfect demonstration of what governments should not do during this period of nervous markets.”

Although Sterling has pulled back from September lows and a record low for the Pound to Dollar (GBP/USD) exchange rate, Nordea is very wary over UK fundamentals, especially given the damage to market sentiment which will make it much more difficult to attract capital inflows.

According to Nordea; “it takes a long time to build up trust which can be easily lost in a moment. While a political turnaround will be welcome, the poor economic fundamentals in the UK, sky-high inflation, financial imbalances and pension funds under strain will continue to weigh upon the pound.”

Nevertheless, there has been only a slight downgrading of Sterling forecasts in the latest update. The Pound to Euro (GBP/EUR) exchange rate is seen as finding support around 1.14 before a recovery to 1.16 at the end of 2024.

Nordea expects that tightening fiscal conditions will continue to hamper currencies which are linked to the global economic performance; “Risk sensitive currencies like the NOK and SEK will continue to feel the pressure of higher global rates, falling equity markets, and a gloomy global economic outlook.”

There will be scope for gradual recoveries in 2023 as interest rate peak.

Table of currency forecasts from Nordea covering period 2023-2024.

Peer spot 3mths June 2023 Dec 2023 Dec 2024
EUR/USD 0.98 0.93 0.98 1.03 1.10
USD/JPY 150 160 145 135 125
GBP/USD 1.12 1.06 1.13 1.20 1.28
EUR/GBP 0.87 0.88 0.87 0.86 0.86
EUR/CHF 0.98 0.95 0.97 1.00 1.05
AUD/USD 0.63 0.60 0.65 0.70 0.75
USD/CAD 1.38 1.42 1.37 1.32 1.30
NZD/USD 0.57 0.55 0.60 0.65 0.70
EUR/NOK 10.40 10.75 10.20 9.75 9.60
EUR/SEK 11.00 11.05 10.90 10.70 10.50
USD/CNY 7.11 7.40 7.00 6.90 6.70