It is unlikely to be an easy ride for USD bears – Rabobank

The euphoric market reaction to Tuesday’s release of softer-than-expected US CPI inflation data is now set to be re-examined. Economists at Rabobank analyze USD outlook.

EUR bulls will likely run into headwinds over the coming months

Headwinds to Chinese growth, combined with the prospect of a recession in the US early next year and the possibility that the Eurozone is already in a recession have been viewed by us as hurdles to risk appetite and therefore supportive factors for the USD. Early Fed rate cuts combined with a less negative outlook for Chinese growth would counter this view and undermine the value of the USD. However, it is unlikely to be an easy ride for USD bears.

It is very likely that Fed officials will retain a cautious view on policy for now. Also, while Chinese data may be showing more sparks of life, weak foreign investment data in the country suggests that it might be a while before optimism broadens. Additionally, weak growth in the Eurozone suggests that EUR bulls will likely run into headwinds over the coming months. The German economy is mired in stagnation suggesting that the EUR could also be bounced around by rate cut speculation in the weeks ahead.

US CPI data means that our three-month forecast of EUR/USD 1.02 appears a long way away. We will be watching economic data and the reactions of policymakers closely in the coming weeks in order to evaluate this view.