Rabıobank’s Senior FX Strategist Jane Foley discusses recent EUR/USD strength, noting it was mainly driven by a softer Dollar after weak United States (US) labour data reduced Federal Reserve (Fed) rate hike expectations. Foley highlights resilient Eurozone data but also growth headwinds and limited appetite for strong Euro appreciation. Rabobank now expects EUR/USD to reach 1.16 in three months, assuming no major Eurozone growth surprises.

Euro gains on softer US outlook

“At the end of last month EUR/USD lurched higher. On Friday, the currency pair traded at its highest levels since June 17. This may give the illusion of a buoyant EUR.”

“The release of the surprisingly soft US July labour market report was the clear trigger for the move higher in EUR/USD on Friday. The softer data dealt a blow to expectations of Fed rate hikes which knocked US yields and the greenback lower.”

“Indeed, it is RaboResearch’s view that the Fed will hold rates steady this year, which suggests scope for further softness in the USD.”

“Given than another ECB rate hike is already in the price, a move is unlikely to provide much additional upside incentive for the EUR. We see scope for a modest upside bias in EUR/USD in the months ahead, mostly reflecting a reduction in Fed rate hike speculation and we have brought forward our forecast of a move to 1.16 from 6mths to 3mth.”

“That said, in the absence of upside growth surprises in Q3, we are doubtful that the market will be keen to rebuild substantial EUR long positions in the coming months.”

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