Euro: Undervaluation and ECB succession – ING

Francesco Pesole at ING argues the recent EUR/USD drop is too sharp versus short-term rate differentials, with the pair around 2.1–2.3% undervalued in their models. He links this to tightened front-end spreads despite risk-off equities and expects EUR/USD to move back above 1.120, while ECB succession discussions should have only contained, short-lived impact on the Euro.

Euro seen undervalued vs 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.)