According to analysts from Rabobank, the euro should remain well supported versus the US dollar in the short-term considering the outlook for US yields and Eurozone economic expectations.
Key Quotes:
“The Fed’s policy of reacting to data rather than forecasts appears to have been justified and both the market and the Fed will be watching forthcoming US economic data extremely closely. As it stands, Fed Chair Powell prefers to maintain a dovish position, reasoning that inflationary pressures in the coming months will be transitory and that the recovery is far from complete. This restraint is being echoed in nominal bond yields and in the value of the USD.”
“It is clear that the Fed’s accommodative policies combined with its forward guidance continue to have a persuasive impact on the US rate curve. That said, US break-even inflation rates have been on the increase in recent weeks.”
“The rise in US inflation expectations is in tune with concerns about supply bottle neck and, more recently, a reaction to the news regarding the Colonial Pipeline incident. The result has been downward pressure on real US yields.”
“For nominal yields to rise, the market will have to be more confident of a demand led economic recovery. While the release of US retail sales data at the end of the week will be watched closely, confidence it unlikely to return significantly until the US labour data underpins this outlook. Meanwhile, bolstered expectations that the Eurozone economy will benefit in the second half of the year from a hastened vaccine roll-out is helping to support the EUR. This suggests EUR/USD should remain well supported in the near-term.”