Euro: Choppy range trading outlook – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses EUR/USD dynamics around divergent inflation and policy outlooks in the US and Eurozone. They highlight US Treasury buyback plans, questions over US Dollar (USD) debasement, and Fed credibility versus the European Central Bank's (ECB) inflation-fighting reputation. The report anticipates USD-driven volatility and sees EUR/USD confined to ranges with a modest upside bias over the coming months.

Pair seen confined to ranges

"At the June FOMC meeting, nine out of eighteen members projected at least one rate hike this year (Chair Warsh does not participate). In the July Fed policy meeting, three members formally dissented in favour of an immediate rate rise, with the minutes suggesting that “many” members were open to further tightening if inflation does not moderate. That said, the USD fell in response to the Fed’s July meeting with the market disappointed by the lack of a more hawkish surprise."

"Stronger than expected Eurozone Q2 GDP growth data and a decent round of August PMI numbers reflect an economy which has been resilient in the face of this year’s energy price shock. Better than expected economic data and expectations of higher short-term interest rates tend to be currency positive factors. However, while a softer USD allowed EUR/USD to creep higher from late July into mid-August, the market has been reluctant to build long EUR positions against the backdrop of the Iran war in view of the Eurozone’s energy importer status and the headwinds to growth and inflation that this status implies."

"This complicates the outlook for inflation in the US, creates scope for friction between the Treasury and the Fed and heightens the interest in the address by Fed Chair Warsh at Jackson Hole tomorrow."

"In the absence of an end to the war, we expect the EUR’s upside potential to remain contained and favour choppy range trading for EUR/USD around the 1.16 to 1.17 area in the months ahead."

"In view of the imbalance of uncertainties, we expect that price action in EUR/USD in the coming weeks will continue to be dominated by news pertaining to the USD rather than the EUR, even though both the ECB and the Fed have scheduled policy meetings in September. We see scope for further choppy range trading in EUR/USD in the coming months with a upside bias likely lifting the currency pair to the 1.18 area into the spring."

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