US dollar strength has repeatedly confounded market expectations since early last year and there are reasons to suspect that this may continue for a while according to analysts at Rabobank. They expect China/US trade tensions to re-emerge, which could lead to renewed USD support.
Key Quotes:
“The fact that USD strength has repeatedly confounded market expectations since early last year begs the question as to whether the factors that are underpinning the USD have undergone an adjustment in recent years. We argue that there have been changes in the market dynamics behind the USD. Consequently, we would suggest that there is a strong chance that USD strength is likely to continue perplexing the market at least over the next year or so.”
“We fully expect tensions between the US and China to return next year and for this to weigh on risk appetite and support the USD. While any relief following a phase 1 trade deal may lend support to EUR/USD in the weeks ahead, we expect EUR/USD to trend lower to the 1.08 area on a 6 month view on renewed trade tensions and fears of slowing world growth.”
“Given our expectations of a US recession in H2 2020 and the likelihood of an aggressive pace of Fed easing next year, we do expect EUR/USD to recover some ground on a 12 month view. However, we expect Fed rate cuts only to dampen the USD’s shine and see EUR/USD around 1.12 on a 12 month view.”
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