EUR/USD likely to drift lower towards 1.10 by end-2016

After a wave of subdued US data releases such as the August payrolls report and the ISM surveys, anticipation of a hike in the U.S. interest rate in 2016 have been reduced in recent weeks, said Lloyds Bank in a research note. Accordingly, since reaching a low around 1.0950 at the end of July, the currency pair EUR/USD has rebounded in recent weeks, momentarily breaking through 1.13 before settling back at around 1.12.

Partially, the move has also shown certain scaling back in post-EU referendum expectations regarding the ECB’s policy response. ECB President Mario Draghi was cautious regarding the prospect of additional monetary easing at the recent ECB meeting, but given that the currency bloc’s inflation projection continues to be lower than the 2 percent target in the forecast horizon, the ECB is expected to still extend its quantitative easing program in the months ahead.

In the meantime, if the U.S. economy recovers in the second half of 2016 as projected and if jobs growth continues to stay strong and inflation continues to accelerate towards 2 percent, the U.S. Fed might hike rates before the end of 2016. Given these factors, the currency pair EUR/USD is expected to drift lower towards 1.10 by the end of this year, according to Lloyds Bank.