Rabobank’s Euro recovery forecast depends on a retreat in Fed hike expectations, while the Iran war constrains near-term gains.

Rabobank has lowered its one-month Euro forecast from 1.16 to 1.14, while retaining a three-month recovery target of 1.16.

The Euro to US Dollar exchange rate (EUR/USD) stood near 1.1377 on Thursday, down 0.04% on the day after Wednesday’s 0.58% decline.

The bank highlighted how far the Dollar’s performance has departed from expectations:

“Clearly, the market had not expected that the USD would be entering the final quarter of the year on the front foot.”

Rabobank argues that European growth has held up, but energy risks discourage investors from rebuilding Euro positions:

“That said, we retain the view that the EUR will struggle to find upside momentum during the duration of the Iran war and have revised down our 1 month forecast to 1.14 from 1.16.”

That leaves even the reduced forecast slightly above spot, with June’s annual low of 1.1325 just over half a cent away.

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The bank estimates markets now assign roughly a 70% chance to an October Fed hike, following September’s increase.

Although the eurozone composite PMI rose to 53.1 in September, Rabobank says stronger US survey results have overshadowed Europe’s improvement.

Its recovery case rests on investors expecting more US tightening than the Fed ultimately delivers:

“Our expectation that EUR/USD will return to 1.16 on a 3 month view reflects the Rabobank house view that the market has priced in too much Fed policy tightening.”

That broadly aligns with ING’s 1.160 year-end call, discussed in our earlier comparison with Goldman Sachs.

Goldman’s three-month target is 1.14, falling to 1.12 at six and twelve months.

Rabobank’s 1.16 would require a recovery of approximately 2%, but the bank cautions:

“Next year’s French Presidential election may also limit potential for the EUR. We will be reviewing our EUR/USD forecasts in the coming weeks.”

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