Synopsis:

ING argues that despite recent volatility, the rate spread between the euro and the US dollar continues to support a higher EUR/USD, with a favorable outlook maintained.

Key Points:

1. EUR/USD Resilience:

   • Recent Movements: EUR/USD briefly dipped below 1.090 following US jobless claims data but quickly rebounded as the initial move was deemed overdone.
   • Rate Spread Analysis: The 2-year EUR
      
     swap rate gap has only marginally widened to -104bp, suggesting that the fundamental case for a higher EUR/USD remains strong.

2. Outlook:

   • Improvement in Risk Sentiment: ING expects the improved risk sentiment to support a further leg higher for EUR/USD.
   • Market Sentiment: Even if markets adopt a more defensive stance ahead of the key US CPI release, ING believes EUR/USD is more likely to flatten rather than experience significant depreciation, thanks to the favorable rate spread.
   • Short-Term Target: ING maintains its near-term target for EUR/USD at 1.10, supported by the current rate environment.

3. EUR/GBP Outlook:

   • EUR/GBP Appreciation: ING also favors a move higher for EUR/GBP, targeting a return above 0.860 despite recent risk-driven corrections.

Conclusion:

ING remains optimistic about EUR/USD, underpinned by the supportive rate spread and improving risk sentiment. Even with potential near-term volatility ahead of the US CPI release, they expect EUR/USD to maintain its upward trajectory, with a target of 1.10 in the near term. Additionally, they see potential for EUR/GBP to appreciate above 0.860.