EUR/USD: What Would It Take For Another Dip Below 1.10? - Danske

As widely expected, the Fed maintained the Fed funds target rate unchanged at 0.25%-0.50% - but the Fed sent a dovish signal.

The median ‘dot’ for this year was lowered down to signalling two hikes (down from four) as the Fed thinks that ‘global economic and financial developments continue to pose risks’.

We stick to our view that the Fed will hike once this year, most likely in September. The Fed has signalled that it wants to avoid tightening too much, too quickly.

Needless to say, the surprisingly dovish message sent USD crosses lower across the board with EUR/USD testing new post-ECB highs above the 1.12 level. Indeed, this was not the day for the Fed repricing in a more hawkish direction we have otherwise been waiting for, and the bold reaction higher in EUR/USD is in our view clearly testament to the sensitivity in the cross being higher to USD-negative factors than the opposite in the present environment given that the cross is stretched on the downside on not least valuation measures; thus the boost to risk assets was not strong enough to drag the euro (nowadays more of a safe haven then USD) lower. With the Fed set to deliver merely a September hike this year, in our view, the case for USD upside looks increasingly weak.

What would it take for another firm dip below the 1.10 level then? In our view, this requires a new significant uptick in US money-market rates, which could, for example, be brought about if oil prices show more firm signs of stabilisation as this should dampen fears of a continued drop in US inflation expectations and of a financial shock arising from the US energy sector.

In the absence of USD support from relative interest rates, we are likely in for range-trading in the 1.10-1.14 interval for the pair near term before a more sustained move higher further out (still looking for 1.16 in 12M)

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