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Aug 23 - 06:55 PM

EUR/USD: Why A Prolonged Short-Term Undervaluation Could Be On The Cards - ING

By eFXdata  —  Aug 23 - 03:00 PM

ING Research discusses EUR/USD outlook and sees a scope for the pair to stay in an undervalued territory for longer. 

EUR/USD suffered another sharp drop yesterday, as a breach of parity led to a break below 20- year lows. While the move likely brought the pair further into short-term undervaluation territory, we must reiterate two important points," ING notes. 

"First, a prolonged short-term undervaluation, so a risk premium, is not unwarranted considering the unprecedented risks to the eurozone’s economic outlook caused by seemingly unstoppable energy price increases. Like in previous instances – e.g. the Greek crisis, and Italian political turmoil – that risk premium can remain priced into EUR/USD for several months.

The second point is on medium-term valuation. As recently discussed, the shock to the eurozone’s terms of trade means that a EUR/USD trading moderately below parity is not cheap in real terms when economic fundamentals are taken into account. Another factor to take into account is the potential readjustment of Asian central bank reserves which may include selling EUR/USD after dollar-denominated interventions to support local currencies," ING adds. 

ING Research/Market Commentary


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