Synopsis:

EUR/USD has been fluctuating in a broad range but remains near its short-term fair value of 1.090. While the euro is insulated from volatility in other G10 currencies, ING sees slight downside risks due to rate differentials and ECB easing expectations.

Key Points:

• Fair Value Anchored: EUR/USD’s short-term fair value has been stable just under 1.090, with recent moves above 1.10 seen as stretched.

• Rate Spread Still USD-Supportive: The 2-year swap rate differential (~145bp) continues to favor the USD. With the ECB expected to cut rates next week and the Fed staying cautious, this dynamic may pressure EUR/USD lower.

• Euro’s Resilience: The euro’s high liquidity status has protected it from the larger swings seen in currencies like NOK, SEK, and GBP.

• Trade Policy Overhang: The EU’s response to US tariffs appears measured so far. Reports suggest upcoming EU tariffs will be selective and limited in value compared to US measures.

• Cross Currency Support: If the EU avoids aggressive escalation, the EUR could benefit on the crosses, especially versus EM and high-beta G10 FX.

Conclusion:

While EUR/USD is trading close to fair value, a dovish ECB and still-supportive USD rates present mild downside risk. That said, the euro’s liquidity and cautious EU stance on trade may offer support, particularly in cross pairs.