Euro: Fair value falls on oil and Fed pressure against US Dollar - ING

Francesco Pesole at ING highlights that EUR/USD has broken lower after a more hawkish‑than‑expected Federal Reserve meeting, with the two‑year swap differential at its widest since July. Despite some support from the ECB’s stance, higher Oil prices have dragged ING’s short‑term fair value estimate for EUR/USD down to 1.150, leaving downside risks in place until energy prices correct.

Short term valuation points lower

"We expected a hawkish Fed could take us to 1.150, but the meeting exceeded our expectations and prompted a big break lower in EUR/USD. The two-year swap rate differential widened by 15bp to the widest since July, when EUR/USD was exploring sub-1.14 levels."

"Surely, the ECB’s own hawkish message is offering better support to the euro, but oil prices are much higher than two months ago. Our model now shows a short-term fair value at 1.150, 1% lower than a week ago."

"Further moves in front-end rates, oil or global equities can quickly push that fair value lower. So downside risks persist, and there is little (especially eurozone-born) – outside of a correction in energy prices – that is likely to turn the tide for EUR/USD at this stage."

"There is, incidentally, no strong technical support in sight before the 1.132-1.135 area, which marked the bottom of the summer."

"EUR/USD downside risks remain, with oil prices and risk sentiment in the driver’s seat."

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