EUR: Reluctant to unwind its under-valuation – ING
16.01.2025, 08:27

EUR: Reluctant to unwind its under-valuation – ING

A common theme running amongst FX strategists like ourselves is that EUR/USD has recently been undershooting levels normally suggested by short-term rate differentials. We run a short-term Financial Fair Value model. Other banks will have their own measures. The common theme is that most are saying rate differentials should justify EUR/USD closer to 1.05, ING’s FX analyst Chris Turner notes.

Strong USD can push EUR/USD back to 1.0225/50

“Yesterday provided a great opportunity for EUR/USD to rally. Two-year rate spreads narrowed 5bp on the 0.2% reading on core US CPI. Yet EUR/USD struggled to hold the rally to 1.0350. Not very impressive and perhaps represents a conviction view that the eurozone and the euro will underperform this year on weak growth and weak leadership in the region.”

“We also note that current speculative short positioning seems much more extreme in currencies like the Canadian, Australian and New Zealand dollars than it does in the euro. This suggests that EUR/CAD, EUR/AUD and EUR/NZD could all come lower if Trump does not deliver as aggressive a tariff package as some expect next week.”

“The strong US Dollar (USD) environment could push EUR/USD back to 1.0225/50 today. But we suspect that some buying may emerge there as investors lighten positions ahead of Monday's event risk.”

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