Synopsis:

ING suggests that if the current corrective phase in equity markets stabilizes, EUR/USD is likely to benefit from the narrowing interest rate differentials between the eurozone and the US. A potential move above 1.10 is anticipated in the coming months.

Key Points:

1. Market Correction Phase:

   • Current Situation: It is uncertain whether the ongoing corrective phase in equity markets has concluded.
   • Impact on EUR/USD: If the correction ends, EUR/USD is expected to react positively.

2. Interest Rate Differentials:

   • Narrowing Differentials: There has been a significant narrowing in the interest rate differentials between the eurozone and the US.
   • EUR/USD Response: This narrowing should support EUR/USD trading over 1.10 in the near term.

3. Short-Dated EUR Rates:

   • Market Pricing: Currently, 81bps of European Central Bank easing is priced in for this year.
   • House View: ING’s house view anticipates only 50bps of easing, suggesting market expectations are too aggressive.

4. Support Levels and Triggers:

   • Support Level: ING favors EUR/USD holding the 1.0900 support level.
   • US Data Impact: A potential surprise on the upside in US initial claims could prompt EUR/USD to test the 1.10 level.

Conclusion:

ING is optimistic about EUR/USD’s prospects if equity markets stabilize. The narrowing eurozone-US interest rate differentials and less aggressive ECB easing expectations are expected to support a move above 1.10 in the coming months. Holding the 1.0900 support level and favorable US data could further boost EUR/USD.