EUR: 1.15 not unreasonable for a near-term target – ING

The Euro (USD) remains a key recipient of US Dollar (USD) outflows, and is currently trading around 1.125 after major overnight swings that saw it trade as high as 1.138. Alongside its attractiveness as a liquid reserve currency, markets probably remain relatively optimistic that the EU isn’t willing to escalate the trade war with the US for now, ING’s FX analyst Francesco Pesole notes.

1.15 is a reasonable near-term target for EUR/USD

"It’s important to note that the massive EUR/USD rally is almost entirely a function of the loss of confidence in the dollar, and not at all justified by underlying short-term rate dynamics. The EUR-USD two-year swap rate gap has actually widened in favour of the dollar in the past week, currently standing at 155bp. That level is consistent with EUR/USD trading not far from 1.05."

"When adding the relative equity effect and the freshly inverted correlations with equities, we get a short-term fair value of around 1.09, according to our estimates. We must take that with a pinch of salt, as extreme market volatility and unconventional turns in correlations reduce the explanatory power of such models."

"That said, EUR/USD is certainly overvalued at these levels, by around 4% in our calculations. But we note that relatively similar conditions in the summer of 2020 led to an overvaluation peak of 6% in EUR/USD. In current terms, that would roughly equal a move to 1.15. Given the high volatility and poor liquidity conditions of the FX market, 1.15 is a reasonable near-term target for EUR/USD unless decisions in Washington rebuild some sort of confidence in the dollar."