Euro: Recovery seen but forecasts stay below consensus – Rabobank

Rabobank’s FX Strategy report argues the Euro played a significant role in last year’s strong EUR/USD rally, supported by Germany’s debt brake loosening and improved European growth expectations. The bank now sees Europe’s outlook dampened by inflationary effects from the Strait of Hormuz closure and expects ECB growth forecasts to be revised lower. Rabobank maintains below-consensus EUR/USD projections, with a 3‑month target of 1.16.

Euro’s role and tempered outlook

"In our view, the EUR’s part in the strong directional move higher in EUR/USD last year is often underestimated. While the USD’s fall last year has been well documented, the EUR had a key part to play in the move higher in EUR/USD. Early last year, the single currency was propelled by the loosening in Germany’s debt brake and by resultant optimism about Europe’s growth prospects."

"This year, Europe’s growth prospects have been set back by the inflationary implications related to the closure of the Strait of Hormuz, with much damage already incurred. Although the latest forecasts from the ECB did not show a significant decrease in growth forecasts, we see risk that these will be pared back further in the next forecasting round."

"While the EUR has found some support in the past few months from ECB rate hike expectations, these have been in the price for some time. While we see some scope for a recovery in EUR/USD in the months ahead, we retain below consensus forecasts for EUR/USD. Our 3-month forecast stands at EUR/USD1.16."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)