Rabobank’s Senior FX Strategist Jane Foley discusses EUR/USD dynamics in light of shifting Fed rate hike expectations and Oil-related safe haven flows into the Dollar.
Foley expects choppy range trading in EUR/USD with a modest medium-term upward bias, highlighting Eurozone vulnerability as an energy importer
Rabobank’s updated forecasts see EUR/USD around 1.15 in one month and 1.15–1.16 over 3–6 months. Range-bound pair with mild upside bias “While oil and the DXY dollar index largely moved in the same direction from late January and into the spring, this appeared to break down in June. In our view, this was likely linked to a run up in market speculation regarding the prospects of Fed rate hikes in late spring, which appeared to take over from safe haven demand as the primary source of USD support in this period.
Fed rate hike speculation has recently suffered a setback on the back of recent US data releases.” “Even though the July US CPI inflation data was in line with expectations, the market slightly pared back its expectations for a Fed rate hike. In line with this the DXY dollar index weakened a little on the news, although it subsequently shifted back towards the top end of its dull August range. The release of softer than expected US payrolls data last week likely provided a filter through which many investors judged yesterday’s US CPI inflation release, since a softer labour market will reduce the risk of second round price effects.” “If Fed rate hike speculation continues to be pared back, in line with RaboResearch’s view, the USD will be exposed to potential downside pressures.