It has been our house view for some time that the Fed will ‘only’ cut rates three times this year. This is in step with the guidance from the FOMC. We have also maintained that the first move may not be until June. Since the market has been priced for a more optimistic outlook on Fed rates, we have been expecting that the USD would appreciate in the first part of this year as easing hopes were reduced. Our 3-month EUR/USD forecast stands at 1.05. We have also been forecasting that the USD would likely give up some ground in the latter half of the year as the. Fed’s easing cycle kicked-off, though we anticipate that these losses could be moderate. Our current 12-month EUR/USD forecast is 1.09. In this piece, we attempt to identify some of the risks to this medium-term view. We identify factors which may result in a low for longer outlook for EUR/USD and maintain our view that EUR/USD is likely to be more comfortable in a 1.04 to 1.12 range over the next 24 months or so, than at levels over 1.15.
While a reduction in Fed interest rates will clearly help support risk appetite, this year’s easing in US monetary policy conditions will be made against the backdrop of sluggish growth in China and potentially further economic stagnation in Germany. Added to this are the conflicts in the Middle East and Ukraine. These factors question whether the safe haven USD will experience a marked outflow in favour of high yielding assets as the Fed cuts rates. In summary the USD could remain better supported over the coming economic cycle than the trends apparent in Figures 1 and 2 suggest. - Rabobank
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