On August 5, the euro experienced a strong rebound against the dollar when the US employment data for July came in far below expectations, prompting market speculation about multiple interest rate cuts by the end of the year.
Jane Foley, head of FX strategy at Rabobank, commented last Friday, "We have withdrawn our target of the euro reaching 1.05 against the dollar in the next three months, primarily because we believe the Federal Reserve is about to cut rates, which could prevent the euro-dollar exchange rate from dropping to that level this year. For now, if the euro approaches 1.10 against the dollar, we would still be inclined to sell the euro-dollar pair."
Currently, the euro has fallen below 1.10 against the dollar and is hovering around 1.0930.
As the market bets on a 100 basis point rate cut by the Federal Reserve, the euro-dollar exchange rate has begun to challenge the technical resistance level around 1.0935, with hopes of reaching the 1.10 mark this week.
This is partly due to polls showing Democratic presidential candidate Harris leading Trump in some states, and last Wednesday's US inflation data for July possibly reinforcing market expectations of an imminent rate cut by the Federal Reserve.
Jane Foley, head of FX strategy at Rabobank, noted, "From a 3 to 6 months perspective, we believe that any euro breakthrough to higher levels is more likely due to dollar weakness rather than euro strength. This scenario could be driven by a weaker-than-expected performance of the US economy or a Harris victory in the election, although our forecast model still bases on a Trump win."
The market generally expects that the data to be released on Wednesday will show that the US July core CPI month-on-month unadjusted rate will be 0.2%, while the July year-on-year unadjusted CPI is expected to fall from 3% to 2.9%. This indicates that the US anti-inflation process is still ongoing and could pressure the dollar, as the dollar typically has a certain negative correlation with inflation.
Forex analyst James Skinner pointed out that the recent volatility of the dollar and the euro-dollar pair's recent breakthrough indicate that the exchange rate may be approaching a phase where it narrows the gap with its fair value. The fair value of the euro-dollar pair has risen from 1.1511 at the beginning of the year to 1.1577.
