Francesco Pesole at ING argues EUR/USD’s break below 1.140 has pushed the pair into stretched undervaluation versus their short-term fair value model, as rate differentials moved in favour of the Euro. While the Dollar-driven move and lack of nearby technical support keep catching a falling knife risky, ING expects eventual convergence toward the 1.1430–1.1450 area rather than new lows.

Undervaluation and limited new lows

“The break below 1.140 in EUR/USD has sent the pair into stretched undervaluation territory according to our short-term fair value model. That’s because short-term rate differentials actually moved in favour of the euro, offsetting the negative impact on fair value from lower equities and oil.”

“The move was entirely dollar-driven. PMIs also surprised on the upside in the eurozone, with services rising sharply, which marginally helped the euro in some crosses.”

“The lack of clear technical support in EUR/USD until the June lows, where intraday spot hit 1.1325-30, means catching the falling knife remains risky for now. However, we don’t see the conditions for a break into new lows just yet unless the short-term rate differential widens in favour of USD.”

“A 1.1430-1.1450 level would be more in line with the current environment. So we’d expect a convergence to that area ultimately.”