EUR/USD: Only a hawkish tilt can turn the tide for the euro as downside risks mount – ING

The EUR/USD pair stalled at 1.1350 first and now marginally below 1.1300 again. In the view of economists at ING, we would need to see a clear hawkish twist by the European Central bank (ECB) to turn the tide for the slightly overvalued and not clearly oversold euro.

Hard to turn the tide

“EUR/USD may prove asymmetrically more sensitive to any hawkish surprise, whether that be on the timing of unwinding asset purchases or on staff projections), compared to signs of extra cautiousness. If, instead, we see no major surprises by the ECB, and given the Fed meeting risks prompting another spike in US short-term yields, we think EUR/USD may be set for another bad week.”

“EUR/USD is slightly overvalued according to our short-term fair value model, suggesting there is still room for the pair to catch up with the unfavourable widening of USD-EUR short-term rates.”

“We think that only a hawkish turn can significantly turn the tide for the euro at the moment. Otherwise, many factors are pointing to EUR/USD weakness as we end the year. A move beneath even the 1.1200 lows is entirely possible. 

“One potential counter-argument is the seasonal tendency of the dollar to underperform in December, although that may require much calmer markets to materialise.”