Euro: Cyclical Dollar strength versus EUR risks – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses EUR/USD within a broader reassessment of Dollar drivers. Foley notes that even if the US Dollar (USD) is in long-term decline, cyclical forces can still support it. Strong US labour data, resilient consumption and equity inflows underpin a firmer Dollar, while the Euro (EUR) faces growth-related headwinds and positioning shifts after the Iran war.

Dollar upswing prospects

"Since the middle of May we have been discussing the potential for directional differentiation between the structural and cyclical drivers of the USD. In summary, even if the USD has entered into a period of long-term decline, many market participants would likely accept that there was space for cyclical uptrends. This month the DXY dollar index has traded at its highest levels since last spring, which begs the question as to whether the greenback has entered into a cyclical upswing."

"We will be re-visiting our EUR/USD forecasts this week with a view to forecasting a more emboldened dollar."

"Even though it is Rabobank’s house view that the Fed will hold rates steady for the remainder of this year, a better-than-expected performance by the US labour market this year, coupled with a resilient consumer sector and strong inflows into US stocks all suggest that the USD will find support this year. By contrast, we expect the EUR to struggle to rebuild enthusiasm back to recent levels."

"That said, without a significant pick up in Eurozone activity data, we expect it will be difficult for EUR bulls to regain the optimism that was in evidence at the start of this year. Earlier this month EUR/USD broke below our 1 month 1.15 forecasts. We will be reviewing our EUR/USD forecasts later this week."

"Given the time frames involved, we would argue that cyclical drivers will still move the USD in both directions. Moreover, most of the time, cyclical factors will likely impact prices in a more urgent fashion than structural changes. As ever, changes in short-term interest rate differentials are a key driver for FX rates."

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