AWARDS
Credito Agricole: FX and Gold Outlook
The euro is expected to continue to suffer from global geopolitical risks. We remain bearish on the EUR/USD from current levels, but expect ECB rate hikes to somewhat limit downside risks in the coming months. Weak growth prospects and the loss of international competitiveness should continue to dampen the attractiveness of euro-denominated assets. US tariffs and domestic demand-driven growth policies in the Eurozone (e.g., German fiscal stimulus) are expected to hurt Eurozone net exports and reduce corporate demand for the euro, thus keeping the EUR/USD historically depressed over the long term. Many positive factors already appear to be factored into the price of the EUR/USD, as evidenced by our long-term fair value model.
The US dollar, the quintessential safe-haven, high-yielding currency, should remain supported even if geopolitical risks in the Middle East recede, as we expect the US economy to outperform many European and Asian economies. The strong economic outlook and persistent inflation could continue to support the Fed's expectations for interest rates and the US dollar. Political uncertainty in the US may persist, but we believe the narrative of US exceptionalism and the US dollar remains valid. A flattening of the US Treasury yield curve could keep US dollar hedging costs prohibitively high and increase the share of unhedged capital inflows into the US. We also expect a resurgence of foreign direct investment inflows and believe the Fed will maintain its institutional independence without a "Mar-a-Lago"-style deal to devalue the US dollar materializing. Finally, the US dollar remains the world's primary legal reserve currency; credible alternatives are lacking. The Swiss franc reached new ten-year highs against the euro and the dollar thanks to sustained safe-haven demand, and the Swiss National Bank (SNB) was forced to step up its defense measures against excessive franc strength. The 0.90 level for the EUR/CHF exchange rate appears to be a threshold the market appears willing to respect, while a further weakening of the franc would require a reduction in geopolitical threats and a subsequent recovery in risk appetite.
We continue to expect Prime Minister Sanae Takaichi's policies to pressure the yen (1) by curbing rate hikes by the Bank of Japan; and (2) through increased government spending, supporting the Nikkei. The negative terms-of-trade shock resulting from rising oil prices due to the Middle East conflict is weighing on the yen. The Bank of Japan and the government's USD/JPY comfort zone is between 150 and 160, as this level does not significantly contribute to inflation and keeps the yen weak enough to support exports and corporate profits without drawing the ire of President Donald Trump. Movements in the USD/JPY above 160 would increase the risk of intervention and a faster pace of rate hikes by the Bank of Japan. Inflation is a key issue for Japanese voters, so Takaichi cannot ignore high inflation, especially if driven by a weak yen.
Gold should continue to be supported by persistent market concerns that the combination of rising government debt and persistent inflation in the G10 will make it difficult to find buyers for the expanding government debt. Fears of fiscal dominance by the Fed could further weigh on US real yields, further boosting gold. A renewed recovery in the US economic outlook and higher US rates and real yields would be needed to dent gold's strength in 2026.
