Currency analysts lift their near-term EUR/USD view and bring forward a 1.18 target as US debt-market worries put the US Dollar back on the defensive.
The Euro to Dollar (EUR/USD) exchange rate ended the week around 1.1677 after a sharp mid-week jump carried the pair as high as 1.1711.
EUR/USD is now up roughly 1.15% in August, while the Dollar has lost ground against the Pound, Euro, Australian Dollar, New Zealand Dollar and Canadian Dollar over the past month. Rabobank has responded by softening its Dollar forecasts and raising its one-to-three-month EUR/USD projection to 1.16 from 1.15.
At first glance, that looks odd. Spot is already above 1.16.
The more important change sits further out: Rabobank has brought forward its 1.18 EUR/USD target to next spring, rather than leaving it on a 12-month horizon.
“We have softened our USD forecasts moderately and, given also resilient Eurozone economic data, increased our 1-to-3-month EUR/USD forecasts to 1.16 from 1.15,” said Rabobank’s Jane Foley.
EUR/USD climbed from below 1.1570 to above 1.17 during the week before giving back some of the advance, leaving the pair comfortably above its recent range lows.
The bigger Dollar problem, in Rabobank’s view, is no longer simply Fed policy.
Concerns over the US Treasury market have “stormed back into the limelight” amid a large budget deficit, rising national debt, above-target inflation and stronger competition for buyers of fixed-income assets.
There is a slightly uncomfortable twist here.
US government bonds used to become more attractive when markets became nervous. Rabobank argues that last year’s Treasury sell-off raised questions over whether that automatic safe-haven relationship can still be taken for granted.
Foley warns that fears of greater government intervention in the Treasury market could add “debasement pressure on the USD”, potentially encouraging some investors to accelerate de-dollarisation.
She is careful not to overplay it.
The bank still argues that “the USD’s dominance in the global payments system is still unchallenged” and expects that status to preserve a floor under Dollar demand and its safe-haven role.
EUR/USD Outlook: 1.18 Comes Forward
The Euro side has improved too.
Rabobank highlights stronger-than-expected Eurozone second-quarter GDP and a robust August PMI round, including Germany’s strongest manufacturing performance in more than four years.
“Despite the June rate hike from the ECB and the expectation of one more rate hike next month, potential growth headwinds have undermined confidence in the single currency,” the bank said.
But the latest data are “consistent with an improved position for the EUR”.
There is still an obvious risk. Europe remains an energy importer, so another escalation in the Iran conflict would revive the same growth and inflation concerns that hurt the Euro earlier in the year.
The Dollar’s weakness has become broad rather than confined to EUR/USD, with all five major USD crosses in the chart below their levels from a month earlier.
Rabobank’s forecast path reflects that tension rather well: 1.16 at one and three months, 1.17 at six months and 1.18 at nine and twelve months.
So this is not a call for EUR/USD to sprint higher from 1.17.
Quite the opposite. Rabobank still expects some near-term consolidation.
What has changed is the destination.
The bank now thinks 1.18 can arrive sooner, with the Dollar’s fiscal and Treasury-market vulnerabilities becoming harder to ignore.
