According to Jane Foley, senior FX strategist at Rabobank, a surge in expectations regarding the likelihood of Fed easing has weighed on the USD, taking EUR/USD back to levels last seen in the middle of April and pushing the DXY dollar index back down to the 97.00 support area.
Key Quotes
“The move in the USD coincides with dovish comments from the Fed’s Bullard who suggest that a rate cut from the central bank “may be warranted soon”. While we have been forecasting an aggressive pace of Fed rate cuts starting in mid-2020, we see risk that the market is currently overreacting and look for the USD to recover some ground near-term.”
“The Federal Reserve hiked 9 times between the end of 2015 and December 2019 and the pick-up in interest differentials in favour of the greenback has been a key component of the rally in the USD that started last March. While expectations of rate cuts from the Fed inevitably counter the dollar’s attraction, we expect it is too soon to be worried about aggressive Fed rate cuts in 2019.”
“In addition, downside potential for the USD over the next year or so is likely to be limited by expectations that other G10 central banks will also be pushed into easing monetary policy conditions in the months ahead.”
“Yesterday’s weaker than expected reading for the May US ISM survey encouraged USD bears.”
“There is risk that the ECB may not be as dovish as the market is expecting. While this could lift the EUR in the short turn, the negative implications for Eurozone growth are likely to cloud the outlook for the EUR in the medium-term term and limit upside potential for EUR/USD into 2020 and beyond.”
“We expect the USD to win back some ground vs. the EUR in the near-term. We expect EUR/USD to find a base later this year in the 1.10 area, but expect the recovery in EUR/USD into 2020 to be moderate.”
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