ING sees EUR/USD as vulnerable and likely to test the 1.0635/40 area in the near term. The market is pricing in just a 25% probability for a 25bp rate hike by the European Central Bank (ECB) next week, but ING believes the chances are significantly higher.

Key Points:

• ECB Rate Hike: The market currently estimates only a 25% probability of a 25 basis point rate hike by the ECB next week. ING thinks the real probability is much higher.

• Speculative Positioning: Speculative market positioning leaves the EUR/USD vulnerable to downside risks.

• Energy Story: Given the impact of energy prices, the EUR/USD is in a precarious position.

• Support Levels: ING suggests that EUR/USD could easily breach its support level at 1.0700 and move towards the 1.0635/40 area.

Trading Recommendations:

• Caution on Long Positions: Those holding long positions on EUR/USD should exercise caution due to the downside risks.

• Potential Short Opportunity: Traders might look for opportunities to short EUR/USD, especially if it breaks the 1.0700 support level, aiming for the 1.0635/40 target.

• ECB Watch: Keep an eye on the ECB's policy meeting next week, as a rate hike could affect EUR/USD volatility.

Implications:

For Traders:

• Watch for ECB News: The ECB's decision on interest rates next week could offer a trading catalyst.

• Support Levels: Pay close attention to the 1.0700 support level; a breach could signal a move towards 1.0635/40.

For Policymakers:

• Rate Expectations: The market is currently not fully pricing in the possibility of a rate hike, which could make for an interesting policy dynamic if the ECB chooses to move.

Conclusion:

ING sees a vulnerable EUR/USD in the near term with potential to move towards the 1.0635/40 area. This is in contrast to the market’s low expectations for a rate hike by the ECB next week. Traders should keep an eye on speculative positioning, energy price dynamics, and upcoming ECB policy decisions.