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The direction of yields on both sides of the Atlantic and in particular movements, or lack of, in real yields continue to be instrumental to the outlook for EUR/USD. Jane Foley, Senior FX Strategist at Rabobank, expects the pair to move back lower to the 1.20 level over the next months.

See:  EUR/USD to tackle the year high of 1.2349 as Europe plots path out of lockdown – MUFG

Market’s dialogue with respect to ECB tapering

“On our central view regarding the re-opening of the Eurozone economy, there is scope for some of the market’s hawks to be disappointed over the pace of policy moves from the ECB. While that has implications for our EUR outlook, how that plays out in EUR/USD depends on how market expectations develop with respect to how monetary policy settings are shaping up in the US.”  

“The softness of real yields remains a constraint on the outlook for the USD. While the USD may be knocked around in the spot market by changes in risk appetite and data surprises, broadly speaking it is likely to remain on the defensive unless the Fed signals a less dovish tone on policy.”

“There is speculation in the market that the Fed’s Jackson Hole symposium could provide a backdrop for policy makers to dip their toe into the topic of tapering. This, however, will depend on the path of inflation data and, since it is not scheduled until August, it is likely that the market is coming to terms with the likelihood that USD weakness could prevail in the near-term.”

“On the assumption that the ECB manages tapering expectations in the Eurozone carefully and given the likelihood that reflation/inflation fears will rise again in the US, we see risk on another move below EUR/USD 1.20 on a one-to-month view.”  

 

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