US Dollar: Bearish
The central bank expects the US dollar to weaken in the medium term due to the expected rate cuts by the Fed and slowing growth in the US. However, the downside is somewhat balanced by the fact that a significant amount of easing has already been priced in (around 190 basis points). Risks include the possibility of slower-than-expected Fed easing and uncertainty over the upcoming US elections, which could weigh on the US dollar in either direction.
Euro: Neutral to Bullish
The European Central Bank expects the euro to strengthen against the US dollar, with the EUR/USD pair seen rising to 1.12 by the end of the year. The bank bases its view on expectations of lower inflation in the US to support interest rate cuts by the Federal Reserve. The euro is likely to perform better against the Swiss franc and the Canadian dollar due to the ECB’s relative policy, but may not gain much against the pound. However, it is cautious about eurozone economic data, especially regarding the weaker performance in the third quarter.
Japanese Yen: Bearish
The bank is bearish on the Japanese yen, expecting USD/JPY to reach 155 by the end of the year. Driven by carry trades and structural Japanese outflows, as Japanese investors continue to seek higher returns abroad. Despite potential risks from global geopolitical tensions, fundamentals are expected to keep the yen under pressure.
GBP: Bullish
Bank of America expects sterling, particularly against the Swiss franc, to strengthen on the back of more flexible positioning and a relatively accommodative monetary policy. The bank highlights improving UK economic data, which is in line with expectations of a shallow easing cycle by the Bank of England, with a possible interest rate cut in November. Sterling is also expected to benefit from the UK economy’s resilience to global risks.
AUD: Up
The Australian dollar is heavily favored over the New Zealand and Canadian dollars, with continued strength expected due to supportive global risk sentiment. The Reserve Bank of Australia is expected to maintain its steady policy, which is in contrast to market expectations of a rate cut, which the bank expects to further support the Australian dollar.