BNP Paribas: Bearish outlook on USD with eyes on EUR/USD and USD/JPY

BNP Paribas articulates its bearish stance on the USD over the approaching yr, influenced by the Federal Reserve’s dovish pivot and the broader financial atmosphere. The financial institution additionally offers its long-term targets for EUR/USD and USD/JPY.

Key Factors:

1. USD Off Highs as Yr Ends:

   • The greenback has considerably retreated from its highs, influenced by a mixture of cooling financial information and the Fed’s dovish shift in December.

2. Fed’s Impression and Market Pricing:

   • The Fed’s dovish pivot has accelerated the USD’s decline. Markets are actually pricing in roughly 150 foundation factors of price cuts by the tip of 2024, aligning with BNP Paribas’ expectations.
   • There’s a potential for these price minimize expectations to increase additional if financial information continues to point out a slowdown.

3. Comfortable Touchdown Narrative and Curiosity Fee Differentials:

   • Fed price cuts are believed to assist a story of a delicate financial touchdown.
   • BNP Paribas anticipates fewer price cuts by different main central banks in comparison with the Fed, resulting in narrowing rate of interest differentials between the US and different areas.

4. USD Valuation and World Funding Tendencies:

   • The USD is presently overvalued based on BNP Paribas’ long-term valuation mannequin (BNP Paribas FEER).
   • With the normalization of world financial coverage and better yields, international buyers would possibly diversify away from obese USD publicity.

5. Lengthy-Time period Foreign money Forecasts:

   • BNP Paribas maintains its bearish USD forecasts, predicting EUR/USD to rise to 1.15 and 1.18 by the tip of 2024 and 2025, respectively.
   • The financial institution additionally forecasts USD/JPY to fall to 135 and 130 by the tip of 2024 and 2025.

Conclusion:

BNP Paribas anticipates continued weak point within the USD within the coming years, pushed by components just like the Fed’s dovish financial coverage stance, international financial slowdown, overvaluation issues, and anticipated shifts in international funding traits. The financial institution’s forecasts recommend vital appreciation in EUR/USD and a decline in USD/JPY, reflecting a broader multi-year downtrend within the USD.

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