Firm US Dollar to prevail for some months – Rabobank

Short covering lent some support to the US treasury market on Tuesday and yields are maintaining a slightly lower profile ahead of today’s FOMC meeting. Economists at Rabobank discuss the upcoming Fed decision.

EUR/USD at risk of dipping back to 1.0700 in the weeks ahead

While we recognise the risk that the Fed may be swayed into delaying the start of its rate cutting cycle, we adhere to our long-held central view that the first move is likely to come in June. This forecast references the fact that the Fed may see risks as being balanced between too high inflation on one hand, and the prospect of a hard landing if rates are held at current levels for too long. 

Tuesday’s short covering in the Treasury market indicates speculation that the market may have last week overplayed expectations of a hawkish tone from the Fed today. If that is the case, some post meeting profit-taking in long USD positions would be likely. That said, we expect a firm USD to prevail for some months and see risk of EUR/USD dipping back to 1.0700 in the weeks ahead.