Rabobank Euro To Dollar Forecast: EUR/USD Could Fall Back To 1.15

The Euro to Dollar (EUR/USD) exchange rate came under fresh pressure after disappointing Eurozone business activity data reinforced concerns over the region’s economic outlook and prompted investors to reassess expectations for further European Central Bank tightening.

At the time of writing, EUR/USD traded at 1.15854, down 0.34% on the day and close to its lowest levels of May after extending a pullback from recent highs above 1.18.

According to Rabobank, the latest Eurozone PMI releases delivered a significant blow to confidence in the single currency.

France recorded a particularly weak set of figures, with the composite PMI plunging to 43.5 from 47.6 previously, marking the lowest reading in more than five years and a level normally associated with recession conditions.

Manufacturing and services activity both deteriorated sharply as businesses reported higher fuel costs, rising energy bills and growing supply shortages linked to ongoing disruptions in global trade routes.

Germany’s survey was less dramatic but still disappointing. The German composite PMI remained below the key 50 threshold at 48.6, indicating continued contraction in Europe’s largest economy.

Rabobank noted that the data have increased doubts over whether the ECB will need to deliver the amount of policy tightening currently priced into financial markets.

“The data have caused the market to question whether the ECB needs to hike rates as much as has been expected.”

Markets currently anticipate just over 50 basis points of ECB tightening over the next six months, but Rabobank believes those expectations remain vulnerable to further downgrades.

“In Rabo’s view, there is risk of just one 25bp rate hike from the ECB this year.”

While many investors continue to focus on long-term concerns surrounding the US fiscal outlook and the Dollar’s reserve currency status, Rabobank argues that the Euro’s own fundamentals are deteriorating rapidly.

For much of the past year, investors favoured the Euro amid expectations that stronger German fiscal spending and improving regional growth would support the currency.

However, the closure of the Strait of Hormuz and the resulting surge in energy prices has hit Europe disproportionately hard due to its heavy reliance on imported energy.

“Europe’s position as an energy importer has meant that it is more susceptible than the US to headwinds on both growth and inflation.”

Rabobank believes the Eurozone economy entered this shock from a weaker starting position than during the 2021-22 energy crisis, reducing the likelihood of sustained inflation pressures and limiting the need for aggressive ECB tightening.

At the same time, markets have become increasingly willing to price the possibility of higher US interest rates if energy-driven inflation remains elevated.

That shift has helped support the US Dollar in recent weeks.

Near-Term EUR/USD Forecast: 1.15 Vulnerable if Iran Conflict Drags On

Rabobank believes geopolitical developments remain the key driver for EUR/USD in the near term.

The bank warns that if negotiations fail to deliver progress towards reopening the Strait of Hormuz, safe-haven demand could push the Dollar higher and drag EUR/USD back towards the 1.15 area.

“Any absence of positive news regarding a peace deal in the Iran war could still bring dips to the EUR/USD 1.15 area in the weeks ahead.”

Looking further ahead, Rabobank expects the pair to recover gradually if energy flows normalise and geopolitical tensions ease.

However, the bank is considerably less optimistic than many bullish Euro forecasts currently circulating in the market.

“Faced with slower growth in the Eurozone, we do not expect a move to EUR/USD 1.20 this year.”

KEY TAKEWAY:

Rabobank expects EUR/USD to remain vulnerable in the near term, with weaker Eurozone growth, fading ECB rate-hike expectations and continued geopolitical uncertainty creating scope for further losses towards 1.15 before any sustainable recovery emerges.