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Apr 10 - 12:55 AM

ING: ECB April Meeting and EUR/USD Outlook

By eFXdata  —  Apr 09 - 04:30 PM

Synopsis:

Despite strong US employment figures last Friday, EUR/USD remained stable, indicating a decoupling from rates and FX dynamics observed over the past few months. ING points out the significant gap between EUR/USD and its short-term swap rate differential, attributing this decoupling largely to strong equity performance and global risk sentiment. With the current levels, EUR/USD appears expensive, and the commencement of rate-cutting cycles in the US or eurozone may be necessary to realign it with its rate differential. ING suggests that a tangible policy divergence may be required to drive significant movements in G10 FX.

Key Points:

  • Decoupling Between Rates and FX: EUR/USD has shown resilience despite higher Fed rate expectations, supported by strong equity performance and risk sentiment.
  • Potential Catalysts for Realignment: An equity sell-off or the start of rate-cutting cycles in the US or eurozone could adjust EUR/USD to its lower rate differential.
  • ECB April Meeting Expectations: While a rate cut by the ECB this week could sharply lower EUR/USD, ING anticipates the ECB will inch closer to signaling a June cut, which may not dramatically change the EUR/USD landscape but could limit its upside potential.
  • Near-term EUR/USD Outlook: A stabilization around 1.0800 is likely, with potential drops to 1.07 or lower being more feasible than a break higher to 1.09/1.10.

Conclusion:

As the ECB's April policy meeting approaches, ING expects a cautious approach, potentially setting the stage for a June rate cut. Such expectations, coupled with less likelihood of a June Fed cut, suggest that EUR/USD may remain stable in the near term, with a downward adjustment more likely than a significant rally. Tangible signs of policy divergence will be crucial for driving larger movements in G10 FX, with current dynamics indicating EUR/USD is positioned at a premium relative to its rate differential.

Source:
ING Research/Market Commentary

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