Rabobank Forecasts EUR/USD to Reach 1.20 Over Nine Months
Original reporting by Justin McQueen, as published on Forex Factory
Rabobank analysts are projecting that the euro will gain strength against the U.S. dollar over the next nine months, forecasting that the EUR/USD currency pair will rise to 1.20. While the pair has hovered around 1.08 in recent weeks, the Dutch bank sees multiple economic and monetary policy factors aligning to push the euro higher over the medium term.
Key Highlights:
– Rabobank sees the EUR/USD pair reaching 1.20 within a nine-month outlook.
– The forecast is underpinned by expectations of a weakening U.S. dollar environment.
– Divergence in monetary policy between the Federal Reserve and the European Central Bank (ECB) is central to the forecast.
– Soft-landing expectations in the U.S. have the potential to weaken demand for the dollar as a safe-haven asset.
– Moderate ECB policy tightening, along with political risks in the U.S., could further support the euro.
Overview of Current EUR/USD Trends
Over the past several weeks, the EUR/USD pair has traded within a narrow range near 1.08. The dynamic has been shaped by contrasting economic signals from both sides of the Atlantic. Strength in the U.S economy has supported the dollar, while the euro has been held back by sluggish growth in several Eurozone economies. Despite this, Rabobank sees room for euro appreciation going forward.
The macroeconomic outlook for both the United States and the Eurozone remains mixed, but there are signs of shifting momentum. Rabobank believes that as U.S. interest rates begin to fall and European fundamentals begin to stabilize, the euro will be in a position to outperform the dollar.
Expectations for a Weaker U.S. Dollar
A major pillar of Rabobank’s EUR/USD forecast is a weakening of the U.S. dollar. The strength of the dollar over the last several quarters has been driven by multiple factors, including:
– Aggressive rate hikes by the U.S. Federal Reserve.
– A surge in U.S. Treasury yields, offering attractive returns for investors.
– Ongoing geopolitical tensions, which have pushed investors into the dollar as a safe-haven asset.
Rabobank anticipates that several of these tailwinds for the dollar will begin to dissipate over the coming months. Specifically, the bank expects the Federal Reserve will pivot toward rate cuts as inflation pressures ease and economic data softens. With the dollar highly sensitive to changes in interest rate expectations, this shift could result in U.S. dollar depreciation across a range of currency pairs, including EUR/USD.
Federal Reserve Policy Outlook
The Federal Reserve has consistently emphasized data-dependence in its policy trajectory. While inflation in the U.S. remains above the Fed’s 2 percent target, recent reports have shown signs of cooling. Core inflation in particular has started to moderate, while labor market data suggests that economic activity is beginning to slow.
Rabobank analysts believe the following scenario is likely:
– The Federal Reserve will hold rates steady for a few more meetings, awaiting more evidence of inflation returning to target.
– If inflation trends continue to improve by the latter half of the year, the Fed could implement one or more rate cuts before the start of next year.
– This policy shift will weaken the yield differential between U.S. and Eurozone bonds, reducing the attractiveness of the dollar to foreign investors.
A reduction in interest rate differentials could prompt capital outflows from the U.S., increasing demand for the euro and lifting EUR/USD.
European Central Bank Remains Cautious
Unlike the Federal Reserve, the European Central Bank has shown more caution in signaling rate cuts. Although inflation in the Eurozone has also shown signs of easing, the ECB has emphasized that monetary policy will remain restrictive until there’s further evidence that inflation is returning sustainably to target.
Key considerations for the ECB include:
– Sticky services inflation, which remains above the ECB’s comfort
Read more on EUR/USD trading.