After a particularly rough start to the year, markets have re-assessed the policy outlook, even as February saw a bit of calming from China. Indeed, we also had a change to the baseline Fed call, where there are now 2 rate hikes expected this year instead of an original expectation of 3. Of course, that is a fairly incremental change given that markets currently do not look for a hike this year in any case, and our US Economics team note they see a 40% chance of no rate hikes taking place.
Still, the qualitative nature of our forecasts in terms of expecting a higher USD and higher US yields remains the same, although with marginal changes. We still expect the European Central Bank, for example, to move towards more aggressive easing at their March meeting as they continue to struggle against deflation risks, and the Bank of Japan already had made halting steps towards negative interest rates. Meanwhile, the risk of outright recession in the US does not strike us as high as some estimates in the market, although we still remain concerned around the risks of lower growth.
Of course much of the data, such as an unemployment rate below 5% and gently rising core inflation (Chart 2), point to a relatively more positive US outlook. Forecasts in FX, EM, Rates and Commodities. Since last month, we made a wide variety of incremental FX forecast changes such that we still expect more USD strength, but have pared back such expectations a bit. Most importantly, for our core EUR-USD profile, we lifted it higher so that we now expect parity at year-end rather than 0.95. We also lowered our USD-JPY target for the end of the year to 110 from 120. However, we did not make any other direct changes elsewhere in G10 FX, although some forecast crosses of course changed mechanically as a result of our EUR and JPY shifts. For the emerging market side, our core FX forecasts do not change, including the crucial USD-CNY profile of 6.90 for the end of this year and 6.70 at the end of 2017. But since last month, we did adjust our USD-INR and USD-MXN forecasts.
Outside of FX, our key forecast change is in our target for the benchmark US 10 yr rate, which we now expect to drift only moderately higher to 2.00%, compared to our old target of 2.65%. Similarly, our yield targets moved lower for pretty much of our development market 10yr rate forecasts except for Canada, where we keep them the same as last month. Meanwhile for commodities, our targets remain roughly the same, including expectations for oil to return higher past the mid-40s as the year progresses.
We also have no changes to our outlook for industrial metals, but we did make adjustments for both gold and silver prices.
