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USD potential for further upside intact – Rabobank

FXStreet (Edinburgh) - Jane Foley, Senior Currency Strategist at Rabobank, assessed the current rally in the greenback.

Key Quotes

“While the ECB maintains that its next move could be softening in monetary conditions, the Federal Reserve by contrast is gradually bringing to a halt its QE programme. Market surveys suggest that the first hike in the Fed fund rate could come in Q3 2015, though we expect the doves to hold out a little longer and forecast the first move in the final quarter of next year”.

“While extremely accommodative Fed policy is likely to persist for some time, the timing of the first rate hike has clearly become close enough to captivate market attention. While the Eurozone economy has recently suffered a string of disappointing economic data, the outlook for the US has been buoyed by a better than expected Q2 GDP report and a strong of nonfarm payroll releases showing jobs gains at over 200K a month. Inflation in the US is also far more robust that the Eurozone”.

“While the dovish tone of the FOMC should keep the pace of any broad based USD rally in check, the weak tone of the EUR increases the likelihood that EUR/USD will trend lower in the months ahead. The deterioration in sentiment with respect to the EUR can be detected as far back as May”.

“CFTC speculator’s net EUR positions marked this by turning negative; this trend has continued with the latest set of data showing the largest net short since August 2012. USD positions by contrast have strengthened since the middle of the year”.

“While we expect the pace of further USD gains to be kept in check by the Fed doves, we have revised our 12 mth EUR/USD forecast moderately to 1.28 from 1.30. Our upgraded USD forecasts are also reflected in other crosses. We see scope for GBP/USD to edge to 1.66 medium-term”.

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