The Fed and beyond – Rabobank

With good reason, the market is concerned about the Federal Reserve’s potential policy decisions, notes Jane Foley, Senior FX Strategist at Rabobank.

EUR/USD risk drops back to 1.10

“In July, market expectations of a possible September interest rate cut from the Fed began to strengthen. Consequently, since the beginning of that month, the USD has outperformed all other G10 currencies. There are country-specific factors that have affected some of the other G10 currencies over this period and lent them support against the USD. The BoJ raised rates at the end of July and has maintained an unwavering bias ever since.”

“In the UK, the change in government has so far supported investor sentiment, while in Australia the RBA has signaled that it is maintaining a tight bias. However, for several of the G10 currencies, it is more difficult to attribute a positive change in their fundamentals over the summer. The BoC announced back-to-back interest rate cuts in June and July and cut for a third time in September, and the Riksbank and RBNZ cut rates in August.”

“The ECB announced its second interest rate cut earlier this week and another move is expected before the end of the year. The latest ECB staff forecasts also include a downward revision to euro area growth. In our view, while Fed easing expectations will keep the USD on the back foot, less favorable Eurozone fundamentals are likely to limit upside potential for EUR/USD going forward. We continue to see downside risk at EUR/USD 1.10.”