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.”

Our currency coverage draws on live market data, official economic releases and published bank research.

– Written by


Frank Davies

STORY LINK Pound Sterling Forecast: GBP/USD at Three-Month Low amid UK Fiscal Concerns

The Pound US Dollar (GBP/USD) exchange rate fell to a three-month low on Thursday, as growing expectations of Federal Reserve interest rate hikes strengthened the ‘Greenback’.

At the time of writing, GBP/USD was trading at $1.3220, having recovered slightly from a low of $1.3215 but remaining lower on the day.

The US Dollar (USD) held firm on Thursday as markets continued to anticipate more aggressive action from the Federal Reserve to bring inflation under control.

Expectations of further tightening strengthened after Wednesday’s PMI figures comfortably exceeded forecasts, suggesting the US economy could still be running at a strong pace.

Further support for rate hike bets came on Thursday, when initial jobless claims unexpectedly fell.

Markets are now pricing in a greater than 50% probability that the Federal Reserve will raise interest rates by 50 basis points by the end of the year.

The Pound (GBP) remained subdued, as expectations of further Fed rate hikes sent ripples through global bond markets.

The resulting volatility heightened scrutiny of the UK’s already challenging fiscal position ahead of the Autumn Budget, with reports suggesting the Treasury could reduce its fiscal headroom to avoid having to raise taxes.

Meanwhile, weaker-than-forecast figures from the Confederation of British Industry (CBI) provided another slight drag on Sterling, although the impact was relatively limited.

Near-Term GBP/USD Forecast: US Durable Goods Orders in Focus

Looking ahead, the latest US durable goods orders figures are due on Friday.

A forecast contraction in August could put some pressure on the US Dollar.

However, the ‘Greenback’ may continue to find support if expectations of hawkish Federal Reserve policy sustain demand for the currency.

Risk appetite could also shape the GBP/USD pairing.

As a traditional safe-haven currency, the US Dollar may benefit if investors turn more cautious.

Geopolitical tensions and concerns over rising global borrowing costs could further undermine risk sentiment, potentially lending support to the American Dollar.

With no major UK economic releases scheduled, Sterling is also likely to take its cues from broader market developments, including shifts in risk sentiment, bond market movements and domestic UK headlines.

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USD/JPY is moving higher as traders focus on rising Treasury yields and react to PMI reports from Japan. Manufacturing PMI declined from 54.9 in August to 54.1 in September, compared to analyst forecast of 55. Services PMI decreased from 52.5 to 51.6, compared to analyst consensus of 52.7. Numbers above 50 show expansion.

From the technical point of view, USD/JPY attempts to settle above the resistance level at 158.00 – 158.50. If USD/JPY manages to settle above the 158.00 level, it will head towards the next resistance level, which is located in the 160.00 – 160.50 range.

Strong economic data bolstered expectations for another large rate hike next month. The latest CME Group data shows the odds for a 75 basis point hike in October are now at 66 percent. A 50 basis point hike was considered more likely earlier in the week.

Multiple Fed officials spoke yesterday and reiterated the need for further rate increases. Governor Barr said that rate increases would continue until inflation is more in line with the Fed’s 2 percent target. The other members of the Fed who spoke yesterday all gave similar remarks and said that the recent economic data justified the need for continued rate hikes to combat inflation.

The dollar has stronger nearby drivers of demand than the euro. The European Central Bank (ECB) hiked rates last month, but has signaled no strong preference to raise rates again. Bets against the euro could pay off if energy prices keep falling and further easing measures are put in place.

Sterling is more balanced. The Bank of England (BoE) held rates steady at 3.75% last week, but revised its outlook to more hawkish. The BoE and other hawkish central banks give the British currency some protection against falling energy prices. Barclays and UBS expect an interest rate hike by the BoE in November.

Ongoing Middle East diplomacy will also influence inflation. Falling energy prices should ease inflation across the U.S., Europe and Britain, which could impact rates set by the three central banks.

Overall, we have a DXY bullish bias, bearish EUR and GBP bias.

GBPJPY resumed its negative trading, reaching 208.75 and surpassing the previously suggested first bearish target, confirming its continued adherence to the previously proposed bearish path.

Repeated stability below the barrier at 210.40, along with the continued negative momentum from the key indicators, will increase the chances of the pair soon declining toward the additional support at 208.10. A break below this level would open the way for new bearish targets, initially at 207.40 and 206.80, respectively.

Expected trading range for today: 208.10 and 210.00 

Trend forecast: Bearish