ING expects EUR/USD to drift lower this month and sees it able to fall towards 1.1360, with scope to test the 1.1300-1.1325 area. Rising energy prices are strengthening the dollar while weighing on energy-importing Europe, keeping Federal Reserve tightening expectations alive.
ING expects the euro to weaken further against the US dollar this month, and the bank sees EUR/USD able to fall towards 1.1360 before a possible test of the 1.1300-1.1325 area later in the period. Rising energy prices sit at the centre of that call, according to ING, because they support the dollar while hurting energy-importing Europe.
Why higher energy prices favour the dollar
Two themes are dominating currency markets, ING argues: rising energy prices and strong demand for higher-yielding currencies. The bank says renewed disruption risks in the Gulf are strengthening the dollar because higher energy costs could keep Federal Reserve tightening expectations alive.
Europe stays more exposed. Natural gas costs are beginning to climb again while inventories remain relatively low, which leaves the euro at a disadvantage against the dollar in the near term. Those energy dynamics play out against a backdrop where US inflation concerns remain alive, ING says.
The euro loses momentum
Last week’s corrective rebound in EUR/USD has already started to lose momentum, ING says. The bank notes that higher gas prices have capped the euro’s recovery, and a relatively quiet Eurozone economic calendar means energy markets are likely to sway short-term price action more than comments from European Central Bank officials.
EUR/USD was trading close to 1.1414 on Monday afternoon after remaining largely unchanged over the past week, having already fallen more than 2% during June.
The Federal Reserve holds the key
ING believes upcoming US inflation data and testimony from Federal Reserve Chair Kevin Warsh will be the biggest catalysts for EUR/USD this week. Although headline inflation may soften, the bank expects rising energy prices and resilient core inflation to keep the prospect of another Fed rate increase firmly on the table.
If markets keep believing US interest rates could stay higher for longer, the dollar is likely to remain well supported against lower-yielding currencies such as the euro. Even so, ING does not expect the 1.1300-1.1325 area to give way easily, suggesting it is likely to provide an important floor for EUR/USD during the summer unless the macroeconomic backdrop deteriorates further.
Source: Exchange Rates UK
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