Euro: ING on Undervaluation and ECB Succession

ING’s models put EUR/USD undervaluation at around 2.1–2.3%. Francesco Pesole at ING sees the recent decline as excessive relative to short-term rate differentials. He attributes the valuation gap to narrower front-end spreads despite risk aversion in equities and expects the pair to recover above 1.120. Discussions over ECB succession, meanwhile, should have only a limited, temporary effect on the Euro.

Euro undervaluation against Dollar

"The drop in EUR/USD looks too sharp relative to its short-term rate differential. We estimate short-term undervaluation at around 2.1-2.3%, exceeding what has been justified by the French risk premium. That’s mostly because front-end rate differentials have actually tightened on the back of the stock market turmoil, compensating for worsening risk sentiment."

"Unless risk sentiment faces new instability this week, we expect EUR/USD to make its way back above 1.120."

"Overall, the impact on the euro may prove relatively contained and short-lived. There are 21 voting rights for monetary policy decisions at the ECB, and we don’t see any candidate willing to cause seismic changes at this time of elevated uncertainty."

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