Euro: Range-bound risks with upside caps against US Dollar – Rabobank

Rabobank’s Senior FX Strategist Jane Foley expects EUR/USD to stay largely range-bound near key moving averages as markets await clarity on a potential US-Iran deal and US data that could shift Federal Reserve (Fed) expectations. Foley sees scope for safe-haven US Dollar (USD) demand in the near term, but anticipates a gradual EUR/USD recovery over 3–6 months, with EUR/USD 1.20 remaining a challenging target due to Eurozone growth risks.

Range trading with constrained upside

"EUR/USD traded with a slight upside bias through the last week or so of May and is currently positioned just below the 50-, 100- and 200-day smas, with the latter situated at 1.1682. From a technical perspective, a break above these levels could encourage further buying of the currency pair. However, given that the market is awaiting news regarding a deal between the US and Iran in addition to US economic data which could sway investors’ expectations regarding Fed policy, it seems more likely that the currency pair will trade sideways awaiting fresh fundamental factors."

"Last week, Rabobank revised its geopolitical outlook and now sees risk of no re-opening of the Strait of Hormuz for up to 3 months. On the back of this view we continue to see risk of safe haven USD buying on a 1-month view that could push EUR/USD towards the 1.15 level. We then expect EUR/USD to push higher on a 3-to-6-month view."

"However, we maintain the outlook that a push to EUR/USD1.20 could be a struggle for the single currency this year given Eurozone growth risks."

"This suggests that any break higher in EUR/USD this week may need the trigger of a positive development with respect to the end of the war. At the same time, in view of uncertainty regarding the Fed outlook, the market may be wary of driving EUR/USD much higher ahead of the release of Friday’s US May labour report."

"While an October rate cut from the Fed should allow EUR/USD to trend upwards in H2, we don’t expect the currency pair to gain significant upward traction in this period. The market is already well priced for two ECB rate hikes in this period and, in Rabo’s view, growth headwinds in the Eurozone are likely to ensure that EUR/USD1.20 remains a high bar."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)