EUR/USD could drop under 1.20 before rising back to 1.22 – Rabobank

While it may be too early to argue in favor of a sustained move lower in the EUR/USD pair, analysts at Rabobank retain their view that fundamentals in both the US and Europe have likely altered sufficiently to trigger a pullback to the 1.20 area.

Key Quotes: 

“If the ECB continues to face more issues than the Fed is raising inflation expectations, this could prevent a significant and sustained dip in the value of EUR/USD in the months ahead.”

“Without a significant change in real interest rates in favour of the USD, it is difficult to call for a sustained reversal in the value of the greenback. This may only come if US inflation surprises on the downside or if US nominal rates rise noticeably. In view of the ongoing concerns of Fed Chair Powell about the labour market, his assurances that rate hikes are still a way off and that any tapering of the QE programme would be flagged long in advance, there would seem little prospect of a change in policy from the Fed in the coming months. That said, the market has been positioned long of the EUR and short of the USD and fundamentals have altered. Given the Biden reflation trade and the prospect of a change in direction of political leadership in Europe this year investors may lack the will to continue pressing the EUR/USD exchange rate higher.”

“We see scope for corrective activity to lead to a dip to EUR/USD1.20 in the current quarter before pushing back to 1.22 on a 6-month view.”