Jane Foley, a senior currency strategist at Rabobank, talks about the EUR/USD pair in light of recent shifts in dollar dynamics. She notes that while the U.S. dollar (USD) may experience a long-term decline, cyclical factors could still provide support. Positive U.S. labor statistics, robust consumer spending, and capital inflows into equities bolster the dollar’s strength, whereas the euro (EUR) confronts growth challenges and adjustments following the conflict in Iran.
Outlook for dollar appreciation
“Since around mid-May, we’ve been contemplating the difference between structural and cyclical influences on the USD. To sum it up, even if the USD faces a long-term decline, many in the market believe there’s potential for a cyclical uptick. Currently, the DXY Dollar Index is trading at its highest level since last spring, prompting questions about the possibility of a cyclical rally for the USD.”
“We are planning to reassess our EUR/USD outlook this week as we anticipate increased strength for the dollar.”
“While Rabobank maintains that the Federal Reserve will likely keep interest rates steady for the remainder of the year, the unexpectedly strong U.S. labor market, recovering consumer spending, and substantial capital inflows into U.S. equities suggest support for the dollar this year. Conversely, we believe the euro will find it challenging to regain the enthusiasm it had recently.”
“That said, unless there is a notable uptick in euro area activity indicators, it may be tough for euro bulls to regain the earlier optimism. Earlier this month, EUR/USD slipped below our one-month prediction of 1.15. We will revisit our EUR/USD forecast later this week.”
“Looking at the relevant timelines, we believe cyclical factors will keep influencing the U.S. dollar in various ways. Moreover, cyclical factors typically impact prices more immediately than structural changes do. As always, changes in short-term interest rate differentials remain the main drivers of exchange rates.”
