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Rabobank has slashed its forecasts for the Euro to Dollar exchange rate (EURUSD) amidst mounting pressures on the European economy which should mean the Eurozone falls into recession ahead of the U.S.

To be sure, the U.S. is also still expected to fall into recession - with Rabobank economists expecting this to take place in early 2024 as the impact of rate hikes bites - but this could ultimately still support the Dollar via the 'risk off' channel.

"The USD is likely to remain well supported until the market has the confidence to move back into higher risk assets," says Jane Foley, Senior FX Strategist at Rabobank.

The call comes amidst a deterioration in sentiment amongst investors as they come around to the idea that the Federal Reserve is unlikely to cut interest rates by nearly as much as previously expected in 2024, creating safe-haven demand that has helped the Dollar tear higher against the majority of currencies.

The anticipation of 'higher for longer' interest rates has also boosted longer-term U.S. bond yields which has proven supportive of the Dollar, sending the Euro-Dollar exchange rate back to lows just below 1.05 this week.

This week's data releases meanwhile reveal the Eurozone is underperforming, resulting in some idiosyncratic weakness in the Euro exchange rate complex. Inflation data from Germany and Spain released today has undershot and suggests the ECB is winning the fight against inflation; "CPI inflation data releases for Germany’s regions have shown a softening in price pressures. This will support our house view that ECB has likely reached the top of its rate hike cycle," says Foley.

Midweek saw the release of German consumer confidence data for October showed another dip in the forward-looking index. "In our view, Germany is facing stagnation in the coming months after a technical recession last winter," says Foley.

At the same time, the fiscal health of other key European economies has deteriorated: the Italian government has raised its fiscal deficit target for this year to 5.3% of GDP, up from a previous estimate of 4.5% of GDP.

France and Spain will also breach EU rules that cap the deficit at 3% of GDP.

Rabobank expects the Eurozone economy to fall into recession in the second half of 2023, some months ahead of the U.S.

"Having breached our former EUR/USD1.06 target, we have revised our forecasts lower and now expect EUR/USD to move to 1.02 on a 3-month view and remain lower for longer into 2024," says Foley.