After a wave of subdued US data releases such as the August payrolls report
and the ISM surveys, anticipation of a hike in the U.S. interest rate in 2016
have been reduced in recent weeks, said Lloyds Bank in a research note.
Accordingly, since reaching a low around 1.0950 at the end of July, the currency
pair EUR/USD has rebounded in recent weeks, momentarily breaking through 1.13
before settling back at around 1.12.
Partially, the move has also shown
certain scaling back in post-EU referendum expectations regarding the ECB’s
policy response. ECB President Mario Draghi was cautious regarding the prospect
of additional monetary easing at the recent ECB meeting, but given that the
currency bloc’s inflation projection continues to be lower than the 2 percent
target in the forecast horizon, the ECB is expected to still extend its
quantitative easing program in the months ahead.
In the meantime, if the
U.S. economy recovers in the second half of 2016 as projected and if jobs growth
continues to stay strong and inflation continues to accelerate towards 2
percent, the U.S. Fed might hike rates before the end of 2016. Given these
factors, the currency pair EUR/USD is expected to drift lower towards 1.10 by
the end of this year, according to Lloyds Bank.