Euro: Choppy range trading outlook – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses the Euro to US Dollar (EUR/USD) currency pair dynamics, focusing on inflation and policy differences between the United States and the Eurozone. She highlights US Treasury buyback plans, concerns over USD debasement, and the Fed's credibility compared to the European Central Bank's (ECB) inflation-fighting reputation.

The report predicts USD-driven volatility, with EUR/USD confined to a range with a slight upside bias over the next few months. In June, nine of the 18 Fed members projected at least one rate hike, while three formally disagreed in favor of an immediate rate increase during the July meeting. Despite this, the USD declined following the Fed meeting, with the market disappointed by the lack of a more hawkish surprise.

Strong Eurozone Q2 GDP growth and August PMI numbers indicate a resilient economy despite high energy prices. Although a stronger USD tends to be positive for currencies, the market remains hesitant to build long EUR positions due to the Eurozone's energy importer status and potential economic and inflation headwinds. This creates challenges for inflation expectations in the US, leading to a potential for choppy range trading for EUR/USD around the 1.16 to 1.17 level in the coming months.

The market will likely continue to be dominated by USD-related news rather than EUR in the upcoming weeks. Both the ECB and Fed have policy meetings scheduled for September, which could provide further insights. In the meantime, traders should closely monitor Fed Chair Kevin Warsh's speech at the Jackson Hole Symposium for more guidance on the US central bank's interest rate path and its potential impact on USD price dynamics.