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The euro outlook has been downgraded in a new analysis from a leading European bank.
Rabobank's latest insights into euro-dollar reveal degraded support structures: the economy and interest rate outlook have shifted from being supportive of the currency pair as the effects of the war in the Middle East start to take effect.
"Europe’s position as an energy importer has meant that it is more susceptible than the US to headwinds on both growth and inflation resulting from the closure of the Strait of Hormuz," says Jane Foley, Senior FX Strategist at Rabobank.
The assessment comes in the wake of data showing the eurozone economy slowed sharply in May. According to PMI survey data released Thursday, the impact of rising energy prices due to the war is having a material effect on activity.
The zone's composite PMI slipped to 47.5 from 48.8, with France proving a major drag with a composite reading of 43.5, a figure that warns unambiguously that Europe's second-largest economy is entering recessionary territory.
"The EUR reacted poorly to this morning’s shockingly poor French PMI release, with EUR/USD briefly dipping back below the 1.16 level," says Foley.
Consensus projections for the next four quarters, compiled from leading investment banks.
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The slowing economy greatly reduces the need to raise interest rates at the European Central Bank (ECB) as there appears to be enough demand destruction underway to limit inflation's ascent.
Shifting tides in ECB interest rate expectations will be a drag on the euro going forward: "Further paring back of ECB rate hike expectations would undermine the value of the EUR," says Foley.
Looking ahead, there's enough evidence to convince the analyst that euro-dollar won't scale her previously held forecast of 1.20 in 2026.
"Any absence of positive news regarding a peace deal in the Iran war could still bring dips to the EUR/USD1.15 area in the weeks ahead," says Foley, adding: "faced with slower growth in the Eurozone, we do not expect a move to EUR/USD1.20 this year."
