EUR/USD: Downside risks toward 1.10 – ING

ING’s Francesco Pesole highlights that divergent central bank rhetoric between the Federal Reserve and European Central Bank is weighing on the Euro against the Dollar. Wider two-year swap differentials favour USD, leaving EUR/USD at risk of testing 1.100 in coming days. ING expects that level to offer solid support, arguing a decisive break below 1.100 would likely require markets to price a 50bp Fed hike in December.

Rate differentials pressure the Euro

"That contrast neatly captures the current EUR/USD story. The pair's two-year swap rate differential has widened by around 15bp over the past five sessions, and we think the scope for further repricing is greater in front-end USD rates than EUR rates in the near term."

"That leaves EUR/USD at material risk of testing 1.100 in the coming days. We expect that level to offer relatively solid support, not least because the pair is already trading at a nearly 2% discount to our short-term fair value."

"A decisive move below 1.100 would probably require markets to seriously entertain a 50bp December hike. That looks like a stretch for now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)