ING’s Francesco Pesole explains that despite political noise in Germany and an additional ECB hike now expected in December, ING keeps its EUR/USD profile unchanged with a 1.160 year-end target. He sees similar front-end pricing for EUR and USD, expects dovish repricing on lower energy prices, but highlights mostly downside risks for EUR/USD this week, especially if Brent rises and Fed hike odds increase.

ECB shift but profile unchanged

“Alongside our Fed call, we’ve changed our ECB forecast and now expect another hike in December. However, we’ve kept our EUR/USD profile unchanged, still targeting 1.160 for year-end. The main reason is that EUR and USD front-end swaps – the most relevant for FX – look quite similar.”

“There are 33-37bp priced in by year-end and 80-90bp by July. Since we see only one more hike by both central banks this year and then a prolonged pause, the dovish repricing should be similar in size. That is often associated with a slightly higher EUR/USD as lower USD rates tend to have a positive knock-on effect on global risk sentiment.”

“Incidentally, we expect that repricing to happen on the back of lower energy prices, also a EUR/USD positive.”

“For this week, we still see mostly downside risks for EUR/USD, though. A retest of the 1.1320-30 lows from June looks premature and is not supported by our short-term fair value model. Nevertheless, it would become a realistic scenario if Brent moves back towards $110/bbl and markets increase pricing for an October Fed hike.”