Despite this year’s adjustment in market pricing, in our view, investors are still too optimistically positioned for Fed rate cuts. The market currently sees scope for a 64 bps reduction in the Fed funds target on a 6-month view. We expect further correction in this outlook and consequently expect the USD to see some support on a 1-to-3-month view.

Additionally, we expect the EUR to perform poorly in the months ahead largely on the back of weakness in the German economy.

We see scope for EUR/USD to dip to 1.05 on a 3-month view before the impact of Fed rate cuts boosts risk appetite and weakens the USD in the second half of the year.