EUR/USD to drift lower to 1.20 as Fed starts tapering discussions – Rabobank

The fallback in Friday’s release of the University of Michigan inflation expectations survey has strengthened the Fed’s view regarding the transience of inflation. Economists at Rabobank anticipate that the USD is likely to be on the front foot ahead of the June 16 FOMC meeting.

See: EUR/USD set to surge above the 1.25 level – ING

FOMC’s discussion about tapering could start this week

“For the USD a reduction in inflation could be supportive insofar as it would boost the value of real yields in the US. On the other hand, the strength of US CPI inflation underpins the view that the first tapering announcement from the Fed is inevitably becoming closer. News on this front would also be positive for the USD.”

“While there may be scope for some short-term disappointment for the USD on the event, we would expect this to be short-lived.”

“We see scope for EUR/USD to test 1.20 this summer on anticipation that the tapering discussion at the Fed will soon begin in earnest.”

“As long as further out inflation forecasts remain anchored the market should absorb this well. That said, a revised inflation outlook increasing the risk of an upward shift in the median expectations regarding the Fed fund rate.” 

“As Philip Marey notes ‘it takes only two more participants (in the FOMC) to shift toward a hike in 2023, to make it a split 9-9 committee on whether to hike or not in 2023’. This is too far away to create too many waves in the market, but such a shift would be marginally USD positive.”