The market is closely watching potential Federal Reserve policy shifts, according to Jane Foley, Senior FX Strategist at Rabobank.
Risk of EUR/USD Pullback to 1.10
Since early July, market speculation around a possible rate cut by the Fed has intensified, leading to a notable underperformance of the US Dollar against other G10 currencies. Several factors have influenced this trend. For instance, the Bank of Japan (BoJ) raised rates in late July and has since maintained a hawkish stance, supporting the Japanese Yen.
In the UK, investor sentiment has been buoyed by the recent change in government, while the Reserve Bank of Australia (RBA) has signaled a continued hawkish bias. However, some G10 currencies have shown positive movement despite less favorable changes in fundamentals. The Bank of Canada (BoC) cut rates three times from June to September, and both the Riksbank and the Reserve Bank of New Zealand (RBNZ) also reduced rates in August.
Earlier this week, the European Central Bank (ECB) announced its second rate cut of the current cycle, with another cut anticipated before year-end. Additionally, the ECB’s latest projections included a downward revision for Eurozone growth. Foley suggests that while expectations of Fed easing will likely keep the US Dollar weaker, the less favorable economic conditions in the Eurozone may limit the upside potential for EUR/USD. Consequently, there remains a risk that the EUR/USD pair could dip back to 1.10.
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