Rabobank Sees EUR/USD Downside Due to Overpriced Fed Tightening

Rabobank's Senior FX Strategist Jane Foley believes that the Euro has been overpriced against the US Dollar, particularly in light of recent market expectations. According to Foley, markets have overestimated the likelihood of a rate hike by the Federal Reserve (Fed), with a 70% chance now seen for an October increase following September's 25-bps hike.

Foley argues that this revaluation has led to a downward revision in Rabobank's forecast for EUR/USD, which is now expected to reach 1.16 on a three-month horizon and 1.14 on a one-month view. This revised outlook reflects the bank's house view that the market has priced in too much Fed policy tightening.

One factor contributing to this downward revision is the ongoing Iran war risks, which Rabobank believes will continue to weigh on the Euro. Additionally, the upcoming French elections are expected to inject uncertainty into the market, further supporting the Dollar.