The Euro-Dollar rate is holding near 1.1660 as ING sees light Euro positioning and US policy risks keeping its 1.18 year-end target in play.
The Euro to Dollar (EUR/USD) exchange rate slipped towards 1.1660 on Monday, giving back part of last week’s surge while remaining comfortably above the levels seen through the first half of August.
The pair was down around 0.15% on the session, after trading between 1.1655 and 1.1687, while August as a whole has still delivered gains of more than 1%.
Foreign exchange analysts at ING remain reluctant to call an end to the Dollar’s broader retreat and retain exchange rate forecasts for EUR/USD at 1.17 by end-September and 1.18 at year-end.
“The dollar opens the week on a soft footing,” said ING’s Chris Turner, adding that “most paths seem to lead to a weaker dollar” despite the potential for Fed Chair Kevin Warsh to upset that view later this week.
There is also room for positioning to do some work.
ING’s latest futures-market analysis shows asset managers and leveraged funds buying Euro contracts, but the scale of those positions remains relatively modest.
“Speculators look quite underweight the euro,” Turner said, a backdrop which leaves scope for further EUR buying if US developments continue to undermine confidence in the Dollar.
That matters after last Wednesday’s sharp EUR/USD breakout.
As we noted in our recent ING Euro outlook, the bank has increasingly viewed Dollar weakness rather than a dramatic Eurozone re-rating as the cleaner route towards higher EUR/USD levels.
EUR/USD spent much of Monday grinding lower from the 1.1680 area, with late trade around 1.1660 leaving the pair close to the bottom of its daily range but still above ING’s key support zone.
Near-Term EUR/USD Outlook: 1.1660/70 Becomes the First Test
ING does not see much justification for a deep reversal at present.
“We do not really see the need for EUR/USD to come back sharply under support at 1.1660/70,” Turner said, although last week’s breakout zone would become vulnerable if risk assets suffered a more substantial setback.
The immediate European calendar includes Germany’s August Ifo survey, where ING expects another improvement following the sharp deterioration seen in March and April.
The more consequential risks sit in the United States.
Markets are digesting fresh US sanctions on Iran, renewed Canada-US trade tensions and questions over how Washington intends to address stress in the Treasury market, with the Dollar recovering modestly on Monday after hitting a three-month low against the Euro last week.
Wednesday’s core PCE inflation release and Friday’s Jackson Hole speech from Warsh should determine whether that rebound has legs.
ING warns the Jackson Hole address “could be a hawkish event risk for the dollar”, particularly if Warsh doubles down on the Fed’s inflation-fighting credentials after his July press conference unsettled the long end of the Treasury curve.
Even so, the bank is not changing its central FX call yet.
“At present, we are happy with our current forecasts for EUR/USD at 1.17 end September and 1.18 for end year,” Turner said, while acknowledging that those projections will be reviewed this week.
That 1.18 year-end target also arrives sooner than the median path in our latest EUR/USD bank forecast survey.
For now, 1.1660/70 is the useful dividing line: holding it leaves ING’s bullish path intact, while a decisive break would suggest last week’s Dollar-driven surge ran too far, too quickly.
