FXStreet (Edinburgh) - Senior Currency Strategist Jane Foley at Rabobank, sees the likelihood of further downside for the European currency.

Key Quotes

“During the last few years the market has been wrong footed so many times when calling for USD strength that it would be reasonable to expect that forecasts are now dressed with a certain degree of caution. That said, over the past 3 month the USD has outperformed every other developed world currencies with the exception of the AUD. This performance suggests that after a prolonged period of weakness the USD may be finally beginning to break the mantles of poor performance”.

“The better tone of the USD this summer is clearly associated with the more constructive tone of US economic data”.

“The minutes of the July 30 FOMC, released yesterday, show a clear change in language with respect to the assessment of labour market conditions. Specifically the term ‘significant’ was dropped in reference to labour market slack. ‘Many’ on the committee now see the risks to the outlook on the economy and labour market as ‘nearly balanced’ and ‘some’ thought there had been sufficient progress to call for a ‘relatively prompt move now’”.

“Tomorrow, Fed Chair Yellen is due to air her views on the labour market during the Jackson Hole central bankers’ conference. In the past she has made it clear that she is deeply concerned about the plight of the jobless American. As a result there is a strong suspicion in the market that she would rather risk a period of too high inflation than another recession. With this in mind there is scope that USD enthusiasm could be sapped tomorrow. That said, we expect EUR/USD to remain bias lower medium-term”.

“ECB President Draghi will also be present at the Jackson Hole event. In contrast to his US counterparts, he comes to the conference following a trail of weak economic releases from core Eurozone nations”.

“Although the ECB’s TLTROs are yet to start, there is a strong likelihood that the ECB will again warn about the risk of further policy easing. We expect EUR/USD to trend towards 1.28 on a 12 mth view and would look sell rallies in EUR/USD”.

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