EUR/USD: Rally overextended, dollar still the king – Rabobank

While the drop in the value of the USD can be explained by fundamental factors, the USD’s safe-haven qualities are derived from its intrinsic qualities rather than those of the US economy. Economists at Rabobank see risk that the move in EUR is overstretched and forecast the EUR/USD pair at 1.15/16 on a three-month view.

Key quotes

“Although the USD’s weakness in recent months can be explained by changes in fundamental factors, it is the intrinsic qualities of the USD rather than those of the US economy that defines its safe-haven appeal. These qualities are likely to ensure that the USD will continue to be a strong recipient of safe-haven flows on any further sharp pullbacks in risk appetite.” 

“Relative growth rates, central bank policy, the path of China/US tensions and the outcome of the US election will all play their part in influencing the performance of the USD from day-to-day. Even though the fundamentals behind the US have weakened, the dominance of the USD remains unchallenged and this is likely to be the case at least for several decades to come.”

“The Eurozone still faces significant economic challenges amid concerns about a second wave of COVID-19 in some areas. Additionally, the formation of the Italexit party on July 23rd suggests that fears of anti-EU sentiment cannot be entirely dismissed.” 

“We see risk of pullbacks in EUR/USD though fresh direction may be absent until liquidity returns to normal levels in September. We expect a move back to the EUR/USD 1.16/1.15 area on a three-month view.”