Euro: ING weighs undervaluation and ECB succession

At around 2.1–2.3% below fair value in ING’s models, EUR/USD has fallen too far relative to short-term interest rate differentials, according to Francesco Pesole. He attributes the undervaluation to a narrowing of front-end spreads despite risk aversion in equities and expects the pair to recover above 1.120. Meanwhile, he sees discussions over the ECB succession having only a limited, temporary effect on the Euro.

Euro looks undervalued 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."

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