Rabobank’s senior FX strategist Jane Foley outlines a reassessment of EUR/USD that separates structural pressure on the US Dollar from shorter-cycle dynamics that can still buoy it. She points to firm US labour data, steady consumer demand and equity inflows as near-term supports for the greenback, while the euro faces growth headwinds and shifting positioning following the Iran war.
The bank says the DXY dollar index has traded this month at its highest levels since last spring, raising the prospect of a cyclical upswing even if the longer-term trend is lower. Rabobank’s house view is that the Fed will hold rates steady for the remainder of this year, yet the recent move in EUR/USD has already challenged its prior benchmarks: the pair broke below its 1-month 1.15 forecast earlier this month. The note adds that short-term interest rate differentials remain a key driver for FX, and that cyclical forces can move the dollar in both directions over the relevant time frames.
Cyclical Divergence Between US And Eurozone
We believe the US Dollar is in a cyclical upswing against the Euro, even if long-term trends suggest otherwise. The recent break of EUR/USD below the 1.1500 level reinforces our view for the coming weeks. This move is driven by the clear divergence in economic momentum between the United States and the Eurozone.
The US economy continues to show remarkable strength, with the May jobs report adding a robust 265,000 new positions and keeping wage growth firm. This resilient labor market and strong consumer spending data give the Federal Reserve little reason to consider cutting interest rates. We expect this policy stance to keep the dollar well-supported through the summer.
In contrast, the Eurozone is grappling with economic headwinds, as the latest flash inflation reading for June fell to just 1.9%. Furthermore, recent business sentiment surveys, such as Germany’s Ifo index, have shown a decline in confidence, pointing to sluggish growth ahead. This makes it difficult for the European Central Bank to adopt a more hawkish tone.
Positioning Strategies And Market Outlook
Given this outlook, we are positioning for further downside in EUR/USD using options. Buying puts with a one-to-two-month expiry offers a defined-risk way to capitalize on a potential slide towards the 1.1200 area. This strategy is particularly attractive as it allows us to express a directional view while limiting our potential loss to the premium paid.
The aftermath of the Iran war has already caused a shift in market positioning toward the safe-haven dollar, but we think there is more room for this trend to run. Current implied volatility in EUR/USD options is not excessively high, meaning it is still a cost-effective time to establish bearish positions. We see an opportunity before the market fully prices in a prolonged period of policy divergence.
Historically, periods where the Fed holds firm while other central banks soften have led to significant dollar rallies, similar to the trend seen in 2014-2015. The widening interest rate differential between US Treasuries and German Bunds remains the most powerful cyclical driver for currency markets. For now, this factor will likely have a more immediate impact on price than any long-term structural changes.
