EUR/USD range to move lower

A volatile path is expected towards a lower range for the euro in the rest of the year. Indeed, EUR/USD is now trading around 1.10, while it was trading closer to 1.15 in spring. The Fed to hike rates this year (September), and then in every other meeting (two rate hikes this year and four next year). 

"Although the US data flow has not been consistently strong, it is strong enough for the Fed to feel confident that a slow tightening cycle can begin. At most, the Fed may wait for December, if the next data prints are mixed. The ECB is expected to sound more dovish in the meetings ahead, starting in September", says RBC Capital Markets. 

While Eurozone data has surprised to the upside in recent months and credit growth has finally picked up, inflation remains persistently low. If anything, Eurozone inflation risks are to the downside, taking into account the latest drop in oil and commodity prices. 

The ECB is due to revise its macro projections in the September meeting. It is too early to pre-commit for QE2, but Draghi could start preparing the ground for it by reminding markets that QE is at least until September next year and by conditioning QE2 to the inflation outlook. EUR/USD positioning is also much lighter than earlier this year. 

"However, the path towards a lower Euro is expected to be choppy, as the US data is not strong enough, at least not yet, to be consistent with a much stronger USD", added RBC Capital Markets.