Synopsis:
SocGen has updated its G10 FX forecasts to reflect Germany’s fiscal expansion, US economic vulnerability, and Japan’s escape from deflation. The expectation of lower US Treasury yields and narrowing US-European rate spreads suggests a weaker USD outlook unless FX markets shift away from rate/yield-driven moves. The yen remains significantly undervalued, with SocGen most confident in Japan’s reflation story.
Key Points:
1️⃣ USD to Weaken as Yields Fall & Rate Differentials Narrow 📉
- Lower US Treasury yields expected in the coming year.
- US-European rate spreads narrowing, making USD less attractive.
2️⃣ Japan’s Escape from Deflation = JPY Upside 🚀
- JPY remains too cheap, with SocGen seeing strong conviction in Japanese reflation.
- The key question is how fast or slow the yen’s appreciation will be.
3️⃣ US Growth Forecasts Must Fall Further to Justify FX Pricing 📊
- Consensus growth forecasts for the US have fallen slightly.
- More downward revisions would be needed to fully justify current FX and rate pricing.
4️⃣ Updated FX Forecasts 🎯
- EUR/USD target: 1.13 (year-end 2025).
- USD/JPY target: 139 (year-end 2025).
Conclusion:
SocGen has updated its G10 FX forecasts to reflect a weaker USD in 2025, driven by lower US yields, narrowing rate differentials, and Japan’s economic shift. The yen remains deeply undervalued, and FX markets will likely adjust as US economic fragility becomes clearer.
