The consensus view at the start of this year was that US inflationary headwinds would ease, yields would fall and the Fed would cut interest rates six or so times during the course of 2024. In line with this view, the Bloomberg FX survey shows that the market median at the start of January was projecting a move in EUR/USD to 1.12 by the end of the year from a starting level around 1.1050. As demonstrated by yet another strong US labour report for March, clearly market optimism regarding the pace of Fed rate cuts was misplaced. The US economy has remained resilient, inflation headwinds have proved to be more stubborn than the market had expected, the median forecast for Fed rate cuts this year have been lowered and the USD has firmed; becoming the best performing G10 currency in the year to date. In recent sessions, the market has become increasingly doubtful about the ability of the Fed to cut rates in June. On the back of the March payrolls report, market pricing was homing in on September for the first Fed rate cut of the cycle. In addition to economic news, there has also been political developments pertaining to both the domestic US and international arenas which can be interpreted as USD positive. The implication is that the greenback is on course for remaining stronger for longer. This strengthens our conviction that EUR/USD is more likely to trade in a 1.04 to 1.12 range in the next 6 to 18 months or so than to sustain levels above 1.15. We maintain a 3-month EUR/USD forecast of 1.05.- Rabobank Strategy
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