EUR/USD Trapped in Choppy Range as Divergent Policies Fuel Volatility

Rabobank's Senior FX Strategist Jane Foley discusses the dynamics of EUR/USD in light of divergent inflation and policy outlooks between the US and Eurozone. She notes that the US Treasury has buyback plans, which raises questions about USD debasement, while the Fed's credibility is being tested against the European Central Bank's reputation for fighting inflation.

The report anticipates USD-driven volatility and sees EUR/USD confined to ranges with a modest upside bias over the coming months. Foley highlights that nine out of eighteen Fed members projected at least one rate hike this year, but the market was disappointed by the lack of a more hawkish surprise in July.

The Eurozone's resilience in the face of energy price shocks is also a factor, with stronger-than-expected GDP growth data and decent August PMI numbers. However, the market has been reluctant to build long EUR positions due to the Iran war's impact on energy imports and its potential headwinds to growth and inflation.

In light of these factors, Foley expects the EUR's upside potential to remain contained and favors choppy range trading for EUR/USD around 1.16-1.17 in the months ahead. She also notes that price action will be dominated by USD news rather than EUR developments, even with policy meetings scheduled for September.