Rabobank’s Senior FX Strategist Jane Foley notes that the Euro has recently become the best performing G10 currency as markets reprice European Central Bank (ECB) tightening. Foley still expects further Federal Reserve (Fed) rate cuts and projects EUR/USD around 1.17 in six months and 1.18 in one year, while keeping a 1‑month forecast at 1.14.

Euro outlook shaped by policy repricing

"Over the past 5 days the EUR has been catapulted to the position of best performing G10 currency. Previously it had been languishing in the bottom half of the G10 performance table measured since the start of the conflict in the Middle East. That said, while the hawkish takeaway from Thursday’s ECB policy meeting has clearly been supportive for the EUR, the current fluid nature of expectations for a range of central banks, combined with the unpredictable nature of the conflict makes it difficult to assume that the EUR will remain at the top of the table."

"On this basis we remain of the view that EUR/USD is likely to be trading in the 1.17 area on a 6-month view and pushing higher into year end. The upward bias is supported by Rabobank’s view that further Fed rate cuts may still be forthcoming."

"Based on our house view of further Fed easing and on the current assumption that oil tankers will be moving through the Strait of Hormuz in the summer (albeit at a reduced level), we are looking for EUR/USD to trend higher in H2 to 1.18 on a 1-year view. While Rabobank’s revised forecast of an April ECB rate hike would provide justification for us to move our 1 month forecast higher from 1.14, the broad level of the USD remains highly sensitive to the tone of the news flow regarding escalation/de-escalation of the conflict. In the absence of concrete signs of de-escalation we prefer to keep our 1 month forecast unchanged at 1.14 for now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)