Euro: Choppy range trading outlook against US Dollar – Rabobank

FXStreet Insights Team FXStreet

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. That said, the uncertainties regarding the re-opening of the Strait of Hormuz remain a USD supportive factor. At the start of the Iran war, the market was positioned short of USDs."

"By contrast, in these circumstances we would expect the market to remain wary of rebuilding long EUR positions. This view stems from the expectation that the Eurozone is more vulnerable to growth and inflation headwinds derived from its stance as an energy importer. Thus, while we see scope for some downside potential for the USD coming from a reduction in Fed rate hike expectations, we expect these to be contained by safe haven demand, until further clarity regarding the Strait of Hormuz emerges. Consequently, we expect choppy range trading to dominate EUR/USD through the rest of the year."

"We continue to favour choppy range trading in EUR/USD in the months ahead with a modest medium term upward bias. We have pushed up our 1-month forecast to EUR/USD1.15 from 1.14 and expect the 1.15-1.16 range to dominate on a 3-to-6-month view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD flirts with 0.7000, lowest since early August amid bullish USD

AUD/USD hits a fresh low since early August during the Asian session on Friday and looks vulnerable near 0.7000 after breaking below the 200-day SMA overnight. Against the backdrop of the hawkish Fed, a two-day rally in oil prices revives inflation fears and continues to push US bond yields to multi-year highs. Adding to this, geopolitical risks lift the US Dollar to a two-month high, overshadowing RBA rate hike bets and weighing on the pair.

USD/JPY pulls back from three-week high after failing near 159.00

USD/JPY edges lower during the Asian session on Friday, stalling its recent strong move to a three-week high of 159.00 as Japanese Yen bears turn cautious amid intervention fears. Meanwhile, the US Dollar retains a strong bullish undertone as the Fed's hawkish outlook and oil-driven inflation fears continue to push US bond yields to multi-year peaks. Furthermore, the BoJ's dovish rate hike last week might cap JPY and support spot prices.

Gold treads water below $4,300

Gold grabs some buying attention and advances marginally at the end of the week, partially retracing the weekly decline, although it is still navigating below the key $4,300 mark per troy ounce. The fresh selling bias on the Greenback and the modest decline in US Treasury yields appear to support the humble advance in the precious metal.

Week ahead: Rate hike bets face a crucial data week

Despite the solid drop from the mid-September high, oil prices remained in the driver’s seat for another week, setting the tone in financial markets. Six months have passed since the late-February start of the US-Iran conflict, and there is still no breakthrough in the stalled talks, despite pressure from regional leaders and the rest of the world.

CFTC Report: Defensive currency positioning takes hold

The week in one sentence: Sterling and Euro shorts deepened in the week to September 22, while Yen longs were cut sharply. Oil positioning improved despite a steep price decline, and Gold exposure remained crowded. The main signal was a more defensive currency positioning backdrop.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.