After the fall in May and June, EUR/USD has been in a bit of a consolidative phase in the past few weeks. The currency pair did seem poised for a steeper drop below 1.1400 in breaching the July 2025 and March 2026 lows at some point last month. However, there was no material follow through in the selling pressure and now we’re seeing things get caught in limbo.
As things stand, it feels like it is all about a rates narrative when it comes to EUR/USD. Even as the US-Iran war is starting up again, inflation worries appear to be more imminent in Europe than it is in the US. That at least according to what recent CPI reports might suggest.
In turn, that is putting a bit of a hard cap on what traders are expecting from the Fed this year. As things stand, Fed funds futures is still just showing ~32 bps of rate hikes by year-end with the first full 25 bps rate hike priced by December. That contrasts against the ECB outlook where traders are pricing in ~45 bps of rate hikes by year-end with the first full 25 bps rate hike priced for October now.
As such, it is expected that the next phase for EUR/USD will largely depend on whether the rate differential above will continue to widen or narrow.
After the latest US CPI report for June, the likes of Goldman Sachs and MUFG now see no reason for the Fed to move this year. However, it’s not exactly an overwhelming consensus view. BofA is one of the more hawkish callers here in expecting the Fed to still deliver 75 bps of rate hikes by year-end. In a note last week, the firm argues that:
“Some clients think the Fed shouldn’t hike because inflation is being driven by one-offs. Per our math, however, underlying inflation is well above target. Some have argued that Warsh will use the task forces as an excuse to not hike. We think he has strategic reasons to hike soon: he’d gain credibility without having to own the inflation problem. Is 75 bps too much? Markets are already pricing nearly 50 bps of hikes so it would take at least 75 bps to deliver meaningful financial tightening.”
And that is also in part a view shared by Danske, as they continue to forecast a lower EUR/USD with a target of 1.1100 for the currency pair.
“We maintain our downward-sloping EUR/USD forecast profile unchanged as we continue to see both tactical and structural downside potential for the cross. We expect US real economic growth to outpace euro area by a wide margin this year and expect the Fed to tighten its monetary policy more than the ECB. As an energy net exporter, US is better insulated against renewed energy supply shocks than the euro area.”
At the same time, JP Morgan is also advocating to sell EUR/USD on rallies in expecting the currency pair to drop further despite the recent consoldation. A brief trading note:
“Plans to re-sell EURUSD are still there but would want to see more pain well into the 1.15 handle on a more ‘medium’ term basis using the 200d (1.1642) as a risk point.”
All in all, it still points to general dollar sentiment as being one driver amid US-Iran geopolitical developments. But in the case of a stronger and more lasting directional move, it’s still all on the rates market now.
In that lieu, it is a question of whether or not traders are underpricing the need and extent of Fed rate hikes for this year.
This article was written by Justin Low at investinglive.com.