EUR/USD: Difficult To See N-Term Direction; Targets Into June Payroll

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In our view, the timing of the next Fed rate hike will depend on the economy continuing to progress, the labour market strengthening further and inflation moving towards its 2% target. While we believe growth and inflation are strong enough to ensure a July rate increase, what will ultimately determine whether this happens will be the June labour market report. In other words, we will likely remain in the dark until July 8.

We maintain our Fed forecast expecting a rate rise in July, although this view is conditional on a strong and convincing recovery in employment in June, signs that the US economy continues to perform well and no increase in financial market stress. Given the present EUR/USD rate and current Fed expectations, the dollar would certainly make substantial gains on the back of a July hike.

We expect EUR/USD to move below 1.10 in 03 to end the year around 1.08. However, the risk to this forecast is obvious; were employment to fail to recover or if there were signs that the economy is slowing, then a summer rate rise no longer is an option. In that case, we would expect EUR/USD to instead move towards 1.16-1.18 in 03.

Still, near-term it is very difficult to see a trigger driving EUR/USD in any particular direction. Perhaps the Brexit referendum may move it higher as a 'Remain'-win would likely benefit the euro more than the dollar, while a vote to leave would certainly produce a move inthe opposite direction.

Our best guess is therefore that the currency pair will remain range bound between 1.13-1.15 in coming weeks. Consequently, we must raise our Q2 EUR/USD forecast to 1.14.

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