Saxo Bank outlook presents a turbulent year ahead for FX and a European revolution

Karthik Subramanian

Saxo Bank has presented its Q3 outlook for the various asset classes and its outlook for FX predicts a turbulent second half of the year driven by the German elections which are expected to mark the beginning of the post-Merkel era.

The German elections are scheduled to be held on September 26 of this year and it is widely expected that the Greens would be winning a slight majority and might form a government through an alliance. Merkel had ruled Germany with an iron hand for around 15 years when she had guided Germany through some turbulent times and was known for her highly conservative approach. Though she had pushed German exports higher, the investment into infrastructure has been low which is why the country has been left behind the digital revolution so far, said Steen Jakobsen who is the Chief Economist at Saxo Bank.

So a change in government is expected to see a big change in the policy outlook with a focus on the Euro region and the climate impact which has assumed some urgent attention from all countries as they push themselves towards targets that they have set themselves.

Effect on the Euro and the Dollar

This event is likely to affect the euro and related currencies around the time of the election and for many months beyond as the effect of the policy changes begin to reflect. The dollar is also expected to come out stronger in the second half of the year, as per the Saxo Outlook. The stimulus over the last few months has pushed so much dollar liquidity into the market but still, the dollar has not fallen as much as was expected. So, now that the market begins to prepare itself for the post-stimulus scenario, the liquidity is likely to lessen and this is likely to push the dollar higher against the other currencies.

“Looking back at the last few months, it’s actually remarkable that the US dollar didn’t fall even more than it did. We had unprecedented USD liquidity from stimulus checks and the US Treasury rapidly drawing down its account at the Fed, suppressing US Treasury yields as the liquidity seeks out a parking spot when banks don’t want it to inflate their balance sheets.

“Q3 will likely see no new stimulus checks nor stimulus outlays of note, and infrastructure spending packages seem to get smaller with every round of bipartisan negotiations after Biden tried to impress with the multitrillion-dollar American Families Plan and American Jobs Plan.”, said John Hardy, Head of FX Strategy at Saxo Bank.

Digital Assets Expect a Boom

As far as digital assets go, Europe would like to lead the world in the blockchain and crypto revolution and the best scenario would be to have a common regulation all across Europe for digital assets and that would really drive growth and innovation in this field. The other big dream would be to have a common digital currency all across Europe which would really drive the financial services and payments systems across the region, the outlook said.

Finance Feeds had also reported on how various countries within Europe have been trying out digital currencies driven by their respective central banks and if and when they achieve a common ground to introduce a digital euro, the region is likely to become the hub for digital assets and growth.

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