EUR/USD faces downside risks towards 1.10 – ING

Widening two-year swap differentials are favouring USD, with ING’s Francesco Pesole highlighting how contrasting rhetoric from the Federal Reserve and European Central Bank is putting pressure on the Euro against the Dollar. EUR/USD consequently faces the risk of a test of 1.100 in the coming days. That level should provide solid support, according to ING, which argues that a decisive break below 1.100 would probably require markets to price in a 50bp Fed rate increase in December.

Euro Comes Under Pressure as Rate Differentials Widen

"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.)