EUR/USD to drift lower to 1.20 as Fed starts tapering discussions – Rabobank

The fallback in Friday’s release of the University of Michigan inflation expectations survey has strengthened the Fed’s view regarding the transience of inflation. Economists at Rabobank anticipate that the USD is probably going to get on the front foot before the June 16 FOMC meeting.

See: EUR/USD set to surge above the 1.25 level – ING

FOMC’s discussion about tapering could start in the week
“For the USD a discount in inflation might be supportive insofar because it would boost the worth of real yields within the US. On the opposite hand, the strength folks CPI inflation underpins the view that the primary tapering announcement from the Fed is inevitably becoming closer. News on this front would even be positive for the USD.”

“While there could also be scope for a few short-term disappointment for the USD on the event, we might expect this to be short-lived.”

“We see scope for EUR/USD to check 1.20 this summer on anticipation that the tapering discussion at the Fed will soon begin in earnest.”

“As long as further out inflation forecasts remain anchored the market should absorb this well. That said, a revised inflation outlook increasing the danger of an upward shift within the median expectations regarding the Fed fund rate.”

“As Philip Marey notes ‘it takes only two more participants (in the FOMC) to shift toward a hike in 2023, to form it a split 9-9 committee on whether to hike or not in 2023’. this is often too distant to make too many waves within the market, but such a shift would be marginally USD positive.”

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