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Jan 03 - 12:55 PM

ING: Navigating EUR/USD's Short-Term Dynamics and Downside Risks

By eFXdata  —  Jan 03 - 12:00 PM

Synopsis:

ING provides insights into the recent performance and potential near-term trajectory of the EUR/USD currency pair. The analysis considers the impact of central bank policies, economic data, and market sentiment on the pair's valuation.

Key Insights:

  1. Recent Performance of EUR/USD:

    • EUR/USD exhibited strength during the holiday season, reaching 1.11 on December 27th, but has since corrected to levels around 1.0950.
    • This recent performance aligns more closely with short-term rate differentials between the Euro and the US Dollar.
  2. Central Bank Rate Speculations:

    • Both the Federal Reserve and the European Central Bank have spurred market speculation about rate cuts, influencing the currency pair.
    • The December policy meetings of these banks have not significantly altered the short-term rate outlook.
  3. EUR/USD and Short-term Rate Dynamics:

    • The EUR-USD 2-year swap rate gap is approximately 125 basis points, near its 2023 lows.
    • Despite detaching from rate dynamics in late 2023 due to dovish Fed bets and equity rallies, EUR/USD could realign with these rates amid changing risk sentiment.
  4. Potential Downside Risks:

    • Given the recent economic developments in the Eurozone and fading risk sentiment, EUR/USD faces downside risks.
    • A decline towards 1.08 is seen as more likely than a rise above 1.10 in the short term.
  5. Focus on Upcoming Inflation Data:

    • Key inflation data from France and Germany, followed by Eurozone figures, are expected to be pivotal in shaping EUR/USD's path this week.

Conclusion:

ING's analysis suggests that EUR/USD may lean towards a downward correction in the near term, influenced by short-term rate differentials, central bank narratives, and upcoming economic data. The pair's detachment from rate dynamics in late 2023 is under scrutiny, with changing market sentiments and Eurozone economic indicators potentially driving a realignment. This perspective emphasizes the importance of closely monitoring central bank policies and economic releases in forecasting currency movements.

Source:
ING Research/Market Commentary

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