20 April 2026
The greenback has undershot our view on relative growth expectations. We are significantly above consensus on US growth for 2027 as the stagflation-lite shock hits the Eurozone significantly more than the US.
The growth outlook matters because the FX/rates correlation is not as strong when the global economy sees a period of narrowing real interest rate differentials. We expect EUR/USD to drift lower to 1.15 from here. Terms of trade matter more than short-term nominal rate differentials during oil shocks even if the ECB delivers on the market implied rate path of two rate hikes.
The pound has failed to capitalise on relative economic surprises versus the greenback. We think rates will be on hold until mid-2027 as rising unemployment stance limits second-round effects on pay growth. We fade the market’s single rate hike in 2026 and think GBP/USD has topped out at 1.35.
