Minor movements in the Euro expected

USD – Some headwinds for the dollar

After strong gains from the summer, the dollar weakened again significantly from October. This continued a volatile sideways movement that began at the start of 2023. On the one hand, the markets reflected the high level of uncertainty regarding interest rate developments in both economic areas. On the other hand, however, the interest rate paths ultimately turned out to be similar. There is no clear preference for one of the two currencies this year either. Interest rate cuts are to be expected in both the eurozone and the USA. However, the timing and extent are uncertain, which speaks for volatility on the markets. We assume that the fundamental picture will shift slightly in favor of the eurozone, where the economy should improve somewhat. In the USA, on the other hand, we expect a slight weakening. All in all, this means some headwind for the dollar and therefore a slight weakening.

JPY – BoJ remains cautious

At its meeting in December, the Bank of Japan indicated that the sustainable and stable achievement of the inflation target is not yet foreseeable with sufficient certainty. For the time being, monetary easing will therefore be continued by controlling the yield curve. In our view, these statements have led to a slight weakening of the yen against the euro since the beginning of the year. The yen will therefore remain heavily dependent on the development of inflation and the Bank of Japan’s reaction to it. In the event of an escalation of crises, the yen could quickly strengthen against the euro again at any time.

CHF – Franc benefits from lower interest rate expectations

Until recently, the franc had strengthened against the euro to a level of 0.94, probably triggered by a significant fall in yields on shorter-term German government bonds. The lower interest rate expectations on the market are obviously weighing on the euro against the franc. Inflation in the two currency areas should be close to each other in the coming months. From this perspective, there should therefore be little reason for the franc to strengthen further against the euro. In the coming weeks, it will therefore be important to keep a close eye on the bond market in particular for shorter maturities. In this context, the ECB will therefore play a decisive role with its further monetary policy decisions in the coming months. In the event of an escalation of geopolitical crises, the Swiss franc could continue to strengthen strongly against the euro at any time.

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