Credit Ágricole: FX and Gold Outlook - FJElite
- The EUR should continue to trade as collateral damage of global geopolitical risks. We are no longer as bearish on EUR/USD from current levels as before because we expect additional ECB tightening to limit the downside risks to a degree in the coming months. Subdued growth prospects and loss of international competitiveness should continue to hurt the appeal of EUR-denominated assets. US tariffs and domestic-demand-driven growth policies in the Eurozone (eg, German fiscal stimulus) could also hurt Eurozone net exports & reduce corporate demand for the EUR and thus keep EUR/USD historically depressed in the longer term. Despite its recent drop, EUR/USD still looks expensive relative to our long-term fair value model.
- The high-yielding, safe-haven King of FX should remain supported even if geopolitical risks in the Middle East start abating, given that we expect the US economy to outperform many European and Asian economies. Robust economic outlook and sticky inflation have already boosted Fed policy rate expectations and the USD’s rate appeal, although we believe that the current market outlook has become too hawkish. US policy uncertainty could intensify again if fiscal dominance fears resurface, muting any future USD gains to a degree. In contrast, the Al boom and thus the US exceptionalism narrative persist and could keep the USD in demand as unhedged foreign portfolio inflows continue to power the US stock market rally. We also expect a pick-up of FDI inflows. Lastly, while the USD is still the world’s preeminent reserve fiat currency, de-dollarisation fears could resurface in the coming months.
- The CHF has hit new decade highs against the EUR and USD on the back of sustained safe-haven demand, and the SNB has had to step up its line of defence against undue CHF strength. EUR/CHF’s 0.90 looks like a line in the sand the market seems willing to respect, while reduced geopolitical threats and a subsequent risk recovery would be needed for the CHF to give up more ground.
- Record levels of intervention have only delayed USD/JPY’s rise as the US-Japan short-term rates spread has continued moving higher, despite the BoJ’s rate hike. The BoJ has given investors no reason to raise their expectations for faster rate hikes. While Japan’s economy benefits from a weak JPY, its authorities must manage the domestic and international politics around the currency leaving intervention still likely. Intervention could help cap the exchange rate at 164; we previously thought the cap would be around 160.
- We maintain a cautious GBP/USD outlook from current levels that is consistent with our above-consensus view on the USD. The GBP could also remain a pressure valve for anxious market participants that fret about the negative consequences from the change at the helm of the Labour Party and the UK government. The GBP could also be vulnerable if persistent stagflation risks fuel concerns about the UK economic and fiscal outlook. We believe however, that some negatives are already priced into the GBP especially vs the EUR, given that the Eurozone would have to deal with the consequences from the negative oil supply shock in the wake of the Iran war as well. We further note that the GBP is already looking oversold while global investors seem underinvested in UK assets.
- USD/CAD has come to challenge the upper bound of its 1.35/1.40 range following a more hawkish June FOMC. Risks of the BoC falling behind the Fed will have to be swiftly tamed for the range-trading pattern to not be durably threatened, as evidence of Canada’s macro resilience could help in the process.
- As investors become more hawkish about the Fed, the AUD is losing its rate advantage at the same time the prices for its energy and hard commodity exports are weakening. A weakening domestic housing market following three rate hikes as well as tax changes in the Federal Budget potentially leave the RBA on hold for the rest of 2026.
- NZ’s economy is bouncing back and the RBNZ’s monetary policy setting is too loose. The central bank will be forced to make a course correction. The RBNZ’s foot dragging on rate hikes threatens even higher rates in the medium term. NZ’s agricultural export prices are holding up, but El Nino is threatening weaker local agricultural production.
- The NOK has had to give up some ground following the correction in energy prices, while still being among the best G10 FX performers. A superior carry appeal and Norway’s solid fundamentals should call for some NOK appreciation to resume in H226, while consolidation could prevail in the near term.
- The SEK has struggled this year after outperforming in 2025. Risks of a wider policy gap between the Riksbank and the ECB could leave the SEK on the back foot in the near term, while more convincing evidence of Sweden’s macro outperformance over the Eurozone is needed for the SEK to reverse course later in the year.
- We believe that many negatives are already in the price of gold following its recent sell-off. Central banks still see XAU as a primary tool to reduce their exposure to the USD given the attempts by the US to weaponise the currency. They could thus resume gold purchases especially if global energy shock continues to fade. Concerns about fiscal dominance over the Fed could return as well, weigh on US real rates and help XAU recover.