While the constant stream of Fed policy speculation this year has made it reasonably straightforward to identify the major drivers of USD direction, the EUR has been less reactive to changing economic and political fundamentals in the Eurozone.
In our view, the resilience of the EUR has been one of the most interesting stories of the G10 FX market this year, though the final few months of the year could still bring some challenges for the single currency.
We expect rallies in EUR/USD to be capped in the 1.12 region in the coming months. We also see scope for dips back to 1.10 assuming the Fed announces a 25 bp rate cut next week, rather than a 50 bps move.
The ECB announced the second rate cut of the cycle earlier this week and another move is widely expected before the end of the year. Latest ECB staff projections also include a downward revision to Eurozone growth. In our view while expectations of Fed easing will keep the USD on the back foot, less than favourable Eurozone fundamentals are likely to cap upside potential for EUR/USD going forward. We continue to see risk of dips back to EUR/USD1.10- Rabobank
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