Nowell has impressed for Exeter since returning from injury in December.
"I hope he can maintain this form and drive himself into the England side," Baxter told BBC Radio Devon.
"Then show form in a very good England set of performances in the Six Nations and he gives himself a fantastic opportunity to go on a Lions tour."
Nowell, 23, has won 18 England caps and was part of the side which whitewashed Australia on tour in the summer of 2016.
But, having missed the start of the season because of thumb surgery, he managed just one replacement appearance against Northampton in September before being injured in England's training camp in Brighton in October and spending two more months on the sidelines.
"He's playing extremely well. He's worked extremely hard, he's had a frustrating injury period and he's worked hard through that," added Baxter.
"He's reaping the rewards for the hard work that he's put in. You're also seeing him reaping the rewards for the team getting him on the front foot as well.
Nowell says playing for the Lions is an ambition of his, telling BBC Radio Cornwall: "I performed at Exeter and that got me my chance with England.
"The next step, if I do get a chance to play for England, is perform well and then the Lions does come next."
England winger Jack Nowell has the ability to be selected for the British and Irish Lions tour to New Zealand, says Exeter head coach Rob Baxter.