Credit Agricole

EUR: We have a neutral to slightly bearish outlook on the EUR in the near term. The Eurozone should recover but the ECB could push back against any unwarranted tightening of the bloc’s financial conditions, keeping the EUR an attractive funding currency. We have recently upgraded our Q221 and Q321 EUR/USD forecast to 1.21 and 1.20 respectively, to account for the pair’s recent outperformance, which we nevertheless consider transitory. We remain more constructive on the EUR in the long term as it is likely to benefit from further recovery in global growth and trade. Indeed, demand from Eurozone corporates and global central banks could prop up the EUR. The EU Recovery Fund’s AAA-rated EUR-bonds can further attract investors looking to diversify away from the USD. EUR/USD also looks undervalued. In all, we continue to see EUR/USD at 1.20 in Q421 before recovering to 1.24 in Q422.

USD: The Fed could start talking taper in the coming months and thus give UST yields and the USD a boost. That said, the USD is the ultimate counter-cyclical currency and could come under pressure as global growth and global trade recover, and as corporates and central banks sell the USD to buy their home currencies and liquid proxies, respectively. The Democratic Party’s control over US Congress and the presidency could result in higher taxes and overregulation and further reduce the appeal of USD assets. These, combined with lingering concerns about the US twin deficits and the USD’s overvaluation, could encourage further diversification out of the USD in the long term.

GBP: Speedy vaccine rollout allowed the UK government to start reopening the economy in March. The BoE has upgraded its economic outlook and lowered the pace of QE purchases. The GBP has emerged as one of the best-performing G10 currencies so far this year. That said, several downside risks to the economic outlook seem to persist after Brexit and could grow after the expiry of the government furlough scheme in June and given the threat of indyref2. We doubt that the recent GBP gains can continue, especially given the downside risks ahead. We have a neutral to slightly bearish outlook on GBP/USD for the remainder of 2021 from current levels and expect further gains only in 2022. We have recently upgraded our Q221 and Q321 forecasts for GBP/USD to 1.40, to reflect the pair’s latest outperformance but kept the rest of our projections unchanged.

JPY: Japan’s slow vaccination rate means that it will lag most of the rest of the G10 in terms of its economic recovery. Add to this Japan’s lower potential growth and the economy and currency will underperform most of the rest of the G10 in 2021. The cut-down version of the Olympics due to Covid-19 will provide the Japanese economy with only a modest boost in 2021. Meanwhile, the US’s Covid-19 vaccination programme has taken the lead from the UK in the G10. The US government has also introduced several more rounds of fiscal spending, which risk overheating the US economy and the FOMC having to taper its asset purchases in the coming six to nine months.