The Euro-Dollar has dropped to 1.158 after Warsh revived Fed hike bets, but Rabobank still sees choppy trade giving way to 1.18 into spring.

The Euro to Dollar (EUR/USD) exchange rate ended Friday at 1.1582 after Kevin Warsh’s Jackson Hole speech triggered the Dollar’s strongest daily advance in more than two months.

The pair had spent most of the previous 48 hours between 1.1640 and 1.1660 before collapsing through 1.1600, leaving Friday’s close close to the bottom of the session range.

Rabobank still expects the broader picture to remain frustratingly two-sided rather than turn into a clean Dollar rally.

“We see scope for further choppy range trading in EUR/USD in the coming months with an upside bias likely lifting the currency pair to the 1.18 area into the spring.”

That forecast looks more interesting after Friday.

Warsh pushed the market-implied probability of a September Fed hike from around 35% to 57.5%, while EUR/USD fell roughly 0.6% to 1.1582.

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Friday’s break lower interrupted what had been a surprisingly resilient August for the Euro, but Rabobank does not think the pair will be driven primarily by European developments from here.

“In view of the imbalance of uncertainties, we expect that price action in EUR/USD in the coming weeks will continue to be dominated by news pertaining to the USD rather than the EUR.”

The “Bessent Put” Complicates the Dollar Story

Rabobank’s argument centres on an increasingly awkward relationship between the US Treasury and the Fed.

“Since the announcement last week that the US Treasury would at least double the size of its bond buyback operations, the market has been discussing the potential for a ‘Bessent put’ and how willing the US Treasury Secretary may be to stem a rise in long-term interest rates.”

The bank sees an obvious political incentive ahead of November’s mid-term elections, but also a cost.

“The market’s ability to signal concerns over fiscal policy, inflation and reflect a true balance between supply and demand could be dampened.”

“This has raised questions over the Treasury’s credibility, which have re-opened the debate about USD debasement.”

Lower long-term yields could also keep financial conditions looser than they otherwise would be, potentially leaving inflation higher for longer and increasing the prospect of tension between Treasury policy and the Fed.

That tension was visible even before Warsh spoke, with Reuters highlighting the contrast between Treasury efforts to push long yields down and the Fed Chair’s emphasis on maintaining inflation discipline.

Rabobank Trusts the ECB More Than the Fed

The Eurozone hardly has an easy inflation outlook either.

Rabobank notes that headline inflation reached 3.2% earlier this year as the Iran-war energy shock fed into consumer prices, with the duration of the conflict still critical for the outlook.

Yet the bank sees one important difference.

“The market has a strong belief in the ECB’s inflation fighting credentials. The Fed’s credibility, by contrast, is still up for debate.”

Eurozone inflation expectations have remained relatively contained, while Rabobank expects another ECB hike in September after June’s increase.

The economy has also held up better than feared.

“Stronger than expected Eurozone Q2 GDP growth data and a decent round of August PMI numbers reflect an economy which has been resilient in the face of this year’s energy price shock.”

That resilience has not translated into aggressive Euro buying.

“The market has been reluctant to build long EUR positions against the backdrop of the Iran war in view of the Eurozone’s energy importer status and the headwinds to growth and inflation that this status implies.”

Hence Rabobank’s near-term conclusion is deliberately restrained.

“In the absence of an end to the war, we expect the EUR’s upside potential to remain contained and favour choppy range trading for EUR/USD around the 1.16 to 1.17 area in the months ahead.”

That 1.16 floor is already being tested after Warsh.

We noted in our previous Rabobank EUR/USD forecast that the bank had brought forward its 1.18 target as US debt-market concerns intensified.

Friday has not removed that forecast, but it has made the path rather less comfortable.

If Fed hike pricing continues to build, EUR/USD can spend more time below Rabobank’s preferred 1.16-1.17 zone.

If Treasury intervention again pulls long yields lower while confidence in US policy comes under pressure, the Dollar side of the equation could reverse quickly.

For Rabobank, that tug of war is the forecast: messy around 1.16-1.17 first, then a gradual move towards 1.18 into spring.