Synopsis:

Nordea forecasts a relatively stable EURUSD exchange rate, with significant fluctuations expected around the 1.08 mark. Contrary to market expectations, Nordea predicts fewer rate cuts from the Federal Reserve (Fed) and the European Central Bank (ECB).

Key Points:

• Market Pricing vs. Nordea's Forecast: Markets are anticipating up to four rate cuts from both the Fed and the ECB, which Nordea considers overly optimistic.
• Interest Rate Trajectory: Nordea expects the ECB to begin rate reductions from the summer of 2024, while it predicts the Fed will hold off on rate cuts until 2025.
• USD Strength: The anticipated interest rate paths suggest a marginally stronger USD against the EUR in the coming year.

Additional FX Drivers:

1. Economic Performance: The current superior economic performance of the US may not sustain indefinitely, impacting USD strength.
2. ECB Rate Cuts and Risk Sentiment: Should the ECB cut rates next summer, it could lead to more positive risk sentiment, potentially limiting the USD's gains.
3. Risks on the Horizon: Factors such as US government debt issues, the 2024 Presidential election, and geopolitical tensions could drive the USD stronger than currently estimated by Nordea.

Conclusion:

Nordea anticipates the EURUSD to experience volatility around the 1.08 level, with large swings likely until next summer. The bank challenges the market's aggressive rate cut expectations and points to a range of economic drivers and geopolitical risks that could influence currency strength. While the medium-term outlook favors a slightly stronger USD, the bank acknowledges the numerous uncertainties that could alter this trajectory.