For very good reason the market is preoccupied by the potential policy decisions of the Federal Reserve, Rabobank’s Senior FX Strategist Jane Foley notes.

Risk of EUR/USD dips back to 1.10

“In July, market expectations regarding a possible September rate cut from the Fed began to firm up.  Consequently, since the start of that month the USD has underperformed all other G10 currencies. There are country specific factors which have impacted some of the other G10 currencies in this period and lent them support vs. the USD. The BoJ hiked rates in late July and has maintained a hawkish bias since then.”

“In the UK, the change of government has so far lent support to investor sentiment, while in Australia the RBA has signalled that it retains a hawkish bias. For a few of the G10 currencies, however, it is more difficult to attribute a positive change in their fundamentals over the summer. The BoC announced back-to-back rate cuts in June and July and cut for a third time in September and the Riksbank and the RBNZ cut rates in August.”

“The ECB announced the second rate cut of the cycle earlier this week and another move is widely expected before the end of the year. Latest ECB staff projections also include a downward revision to Eurozone growth. In our view while expectations of Fed easing will keep the USD on the back foot, less than favourable Eurozone fundamentals are likely to cap upside potential for EUR/USD going forward. We continue to see risk of dips back to EUR/USD1.10.”