Euro: EUR/USD Faces Downside Risks — Rabobank

EUR/USD is currently trading near 1.13734, remaining in the region of its yearly lows. Jane Foley, Senior FX Strategist at Rabobank, notes that despite widespread market forecasts for the pair to rise to around 1.18–1.20 by late 2026, the downside risks for the euro in the short term should not be overlooked.

**Short-Term Pressure Logic**

Rabobank believes that even if the Federal Reserve pushes back against rate hike expectations, the dollar is unlikely to face a massive sell-off. The eurozone's status as an energy-importing region makes it more vulnerable to energy price fluctuations, limiting the euro's upside potential. The bank expects EUR/USD to fluctuate around 1.16 over the next one to three months, still some distance from current levels, reflecting its cautious short-term outlook.

**External Disruptive Factors**

Market reports indicate that Germany's far-right AfD party came in first in the northeastern state election, while Chancellor Merz's mainstream conservative bloc suffered its worst election result since 1949, with political uncertainty weighing on the euro. Meanwhile, the European Central Bank noted in its latest economic report that surging natural gas prices could push eurozone inflation higher faster than in the past. Although a higher share of renewable energy has partially cushioned the impact on electricity prices, energy cost pressures remain a potential headwind for the euro.

**Divergence in Institutional Views**

ING previously analyzed that if Brent crude returns to around $110 per barrel and market bets on a Fed rate hike in October intensify, the likelihood of EUR/USD retesting the June lows of 1.1320 to 1.1330 would increase. However, the bank's short-term fair value model currently does not support such a move. Overall, institutions lean bearish on the euro's short-term direction, but medium-term forecasts still retain room for a rebound.