Danske Research discusses EUR/USD outlook around next week's FOMC policy meeting.
"We expect the Fed to cut again next week in line with market pricing.. We expect the Fed to repeat its easing bias and to lower its dot plot to signal one more cut is on the cards but without a pre-commitment to this," Danske notes.
"The market is priced for a 25bp, but is still expecting this to be followed by more rate cuts. If the Fed delivers a 25bp cut next week, the deciding factor will be the forward guidance on interest rates. Here we see a potential for the Fed to disappoint the market, which would weigh on EUR/USD. Price action in EUR/USD during the July FOMC meeting could provide a good blue print for what to expect from next week’s meeting. EUR/USD dropped some 50pips as Fed only cut 25bp and failed to pre-commit to further rate cuts. We would not be surprised to see a reaction of similar magnitude next week.
In the medium term, we still expect Fed to eventually get ahead of the curve in terms of monetary easing and weaken USD and push EUR/USD higher. However, that is likely a story for next year. In the meantime, we look for EUR/USD to trade close to 1.10 on 1-3M," Danske adds.