Euro: Downside risks persist despite ECB hike call – ING

ING’s Francesco Pesole maintains that despite political unrest in Germany and an anticipated ECB hike in December, the bank's EUR/USD outlook remains unchanged with a year-end target of 1.160. He notes that front-end pricing for both EUR and USD remains similar, and anticipates a dovish repricing due to lower energy prices. However, Pesole emphasizes that there are primarily downside risks for EUR/USD this week, particularly if Brent oil prices increase and the odds of a Fed rate hike rise.

The bank has adjusted its ECB forecast to expect another hike in December, but continues to target 1.160 for the year-end. The main reason is that EUR and USD front-end swaps, which are most relevant for FX, appear quite similar. The bank sees 33-37 basis points priced in by year-end and 80-90 basis points by July. With only one more hike by both central banks this year and then a prolonged pause, the dovish repricing should be of similar magnitude.

This often leads to a slightly higher EUR/USD as lower USD rates can have a positive impact on global risk sentiment. Pesole expects this repricing to occur due to lower energy prices, which would also be positive for EUR/USD. However, for this week, the bank sees mostly downside risks for EUR/USD. A retest of the 1.1320-30 lows from June appears premature and is not supported by the bank's short-term fair value model.

Nevertheless, it could become a realistic scenario if Brent moves closer to $110/bbl and markets incorporate a higher probability of an October Fed hike.