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Jane Foley, Senior FX Strategist at Rabobank, discusses some of the factors that could curtail upside potential in EUR/USD in the coming months. The pair could slide below the 1.20 level.

Key quotes

“For the US to record lower than expected inflation, this may necessitate either a slower than expected US economic recovery, which could be related to the pandemic. Or, higher than expected nominal interest rates across the board. This could be a function of growth and possibility of less QE than expected by the Fed. The market needs to keep an eye on the Treasury’s fiscal response and how this impacts Fed policy to gauge the chances of this scenario.” 

“The ECB could surprise the market by cutting the discount rate further into negative territory. While there are various counter-arguments surrounding the benefits of using negative interest rates for a prolonged period, this would likely have a noticeable impact on weakening the EUR. A souring of political cohesion in the eurozone or the EU could also undermine the EUR.”

“There could be a short squeeze in the USD on negative geopolitical events or if there was a deterioration in the relationship between the US and China. The consensus appears to have adopted the view that US/China relations will be less tense under a Biden Administration than under Trump. That said, the Trump Administration appears to be attempting to box Biden into a hawkish position. In addition, fearful of China’s growing economic and military might, the US electorate has become warier of China than when Biden last served in government.”

“While there is the possibility that China concerns could undermine risk appetite, the generous liquidity provision made available by the Fed and other central banks suggests that investors’ sensitivity to bad news has been dulled somewhat. This suggests that the size of pullbacks on bad news could be limited in the current environment, though there is likely scope for dips back below EUR/USD 1.20 dependent on the newsflow.”