As Jane Foley, senior currency strategist at Rabobank, notes, the market is concerned about the Federal Reserve’s potential monetary policy decisions, and with very good reason.

Risk of EUR/USD falling to 1.10

“In July, market expectations of a possible September Fed rate cut began to strengthen. As a result, the USD has underperformed all other G10 currencies since the beginning of the month. There are country-specific factors that have affected some other G10 currencies during this period and provided support against the USD. The BOJ raised rates in late July and has maintained a hawkish stance since then.”

“In the UK, a change of government has so far supported investor sentiment, while in Australia the RBA has signalled it is maintaining a hawkish stance. However, several G10 currencies are more difficult to attribute to a positive change in their fundamentals over the summer. The BoC announced further rate cuts in June and July, and a third cut in September, while the Riksbank and RBNZ cut rates in August.”

“The ECB announced its second rate cut of the cycle earlier this week, with another move widely expected before the end of the year. The latest ECB staff forecasts also include a downward revision to eurozone growth. In our view, while expectations of Fed easing will keep the USD on the defensive, unfavourable eurozone fundamentals are likely to limit EUR/USD’s upside potential going forward. We continue to see downside risks to EUR/USD1.10.”