CMC comes top with stronger dollar calls for 2015
The FX broker does not see the dollar maintaining that strength this year
Last week, CMC topped the one- and 12-month currency forecast tables with a number of good calls on several pairs.
A year ago, in the wake of the turbulence caused by the Swiss National Bank lifting the floor on EUR/CHF, Michael Hewson, chief market analyst at CMC Markets, felt it was only a matter of time before the European Central Bank (ECB) eased.
"It seemed likely the ECB was going to do quantitative easing (QE) at some point last year, although there was a bit of uncertainty about the timing due to the fact they hadn't got the ruling from the European Court of Justice about the legality of it," he says.
At that time the euro was trading at 1.16. Expecting EUR/USD to reach 1.05 in 12 months' time, Hewson believed the euro would fall lower, regardless of the central bank's actions on QE because he felt it would nonetheless cut interest rates.
"I felt the dollar would strengthen, the euro would weaken because of the divergence in monetary policy between the ECB and the Federal Reserve, and expectation of the Bank of England hiking was slightly overstated," says Hewson.
"Looking ahead, I think the euro could well strengthen against the dollar because expectations of the Fed hiking another two or three times are optimistic at best," he says. "I struggle to see where that rationale comes from, and I think the scope for the ECB to ease further is going to be severely constrained by the fact the ECB governing council is split."
If the Fed does not hike rates in the first half of this year, Hewson feels it is unlikely to do so in the second half to avoid the potential political implications of active monetary policy moves so close to a US presidential election.
I think it'd be a very big hurdle if they were to reverse the December decision, because it would imply they were wrong in the first place – Michael Hewson, CMC Markets
As such, Hewson does not see the dollar appreciating substantially from today's levels. He expects the EUR/USD exchange rate to remain at the 1.10 level in a year's time, up one big figure from the time of writing.
"The Fed may well have to rein back its expectations of another rate this year and that will likely undermine the dollar. It really depends on whether we see a significant decline in wage growth and a further decline in inflation," he says.
"At the moment the Federal Open Market Committee (FOMC) is more on the hawkish than the dovish side; they want to normalise and I think it'd be a very big hurdle if they were to reverse the December decision, because it would imply they were wrong in the first place," he adds.
With regard to the yen, Hewson sees the Bank of Japan remaining accommodative and he expects the USD/JPY pair to move in a range between 115 on the downside and 122 on the top side for the next 12 months.
He expects cable to appreciate somewhat during the course of 2016, to end at 1.50 in 12 months' time, amidst geopolitical and economic uncertainty.
"I don't think we'll see a Bank of England hike this year, simply because of the recent economic data, but also because uncertainty around the Brexit referendum will probably keep sterling on the back foot. I don't think the pound will fall out of bed come the Brexit vote, but I think uncertainty around the vote will make people a little bit cautious," concludes Hewson.
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