Nordea with the note:
We have released new financial forecasts. We expect the Federal Reserve to be aggressive. This year we look for four rate hikes, and the same next year. And the Fed is expected to let its balance sheet shrink from the middle of this year. During the same period we expect the ECB to end its PEPP programme in March and slowly phase out the APP programme during the next 12 months. However, a rate hike from the ECB might not materialise until the end of 2023. Hence, we foresee a significant widening of the interest rate differential in favour of the US dollar and call for more dollar strength this year.
But is it always the case? Does the dollar always strengthen when the Fed tightens its monetary policy? A quick glance at the tightening cycles over the past 30 years indicates that this might not be the case. It appears that EUR/USD has moved more up than down during tightening cycles.
