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Jan 08 - 06:55 PM

ING: Challenges for EUR/USD in Sustaining Gains Above 1.10

By eFXdata  —  Jan 08 - 03:15 PM

Synopsis:

ING provides an analysis of the EUR/USD currency pair, expressing skepticism about the pair's ability to maintain levels above 1.10 in the near term. Their outlook is shaped by the interplay of risk sentiment, equity market dynamics, and central bank actions.

Key Points:

  1. Reliance on Equity Market Outperformance:

    • Sustained gains above 1.10 in EUR/USD would require significant outperformance of global and European equities.
    • ING anticipates a stabilization or correction in global equity markets, which may realign the currency pair with short-term yield spreads.
  2. Eurozone Data and ECB Commentary:

    • Recent data, such as German factory orders, have been underwhelming.
    • Upcoming economic sentiment, retail sales, and unemployment data are not expected to significantly influence market movements.
    • ECB members, including Villeroy, Schnabel, and Lane, may offer remarks that counter current rate cut expectations, particularly in light of December's inflation rebound.
  3. EUR/USD's Unstable Ground:

    • The 2-year swap spread differential remains wide at -125bp, indicating unfavorable conditions for the Euro.
    • The potential "out-doving" of ECB commentary by markets adds to the uncertainty.

Conclusion:

ING's analysis points to a challenging environment for EUR/USD to maintain gains above 1.10. The currency pair's future movements are likely to be influenced heavily by global equity performance and the actions of the European Central Bank. The analysts project a possible return to the 1.08 level over the current quarter, suggesting a period of instability and correction for EUR/USD.

Source:
ING Research/Market Commentary

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