The euro has come under renewed pressure against the US dollar, with ING's Francesco Pesole highlighting that the EUR/USD pair is at risk of testing the 1.1300 level in the near term. This downside risk is attributed to a recent equity sell-off and weak German Purchasing Managers' Index (PMI) data, which reinforce the narrative of diverging economic growth between the US and the eurozone [1]. Specifically, Germany's services PMI fell from 48.1 to 46.8, pulling the composite PMI further into contraction territory, despite the eurozone composite PMI reading of 49.5, which is close to returning to expansion [1].
Pesole notes that the EUR:USD two-year swap rate differential has widened to its largest gap since September, reflecting a renewed risk premium on the dollar. This shift is partly due to market reactions to the spring energy crisis, which has made investors more likely to price risk premiums into the euro [1].
On the policy front, European Central Bank (ECB) Chief Economist Philip Lane delivered a hawkish message, warning that inflation is expected to remain above 2% for some time. This stance contrasts with ECB President Christine Lagarde's more dovish comments earlier in the week, suggesting a potential shift in the Governing Council's consensus towards a more hawkish outlook. Pesole anticipates that additional ECB members may echo Lane's hawkish tone in the near future [1].
Despite the short-term downside risks, Pesole argues that the EUR/USD is currently trading at nearly 1% below ING's short-term fair value estimate. He remains optimistic about a recovery in the coming months, as he expects that market bets on a hawkish Federal Reserve may gradually be scaled back [1].
CONCLUSION
The euro is facing short-term downside pressure due to weak German PMIs and a wider swap rate differential, but ING maintains a cautiously optimistic outlook for a medium-term recovery. ECB officials' hawkish signals and potential shifts in Fed expectations could support the euro's rebound in the coming months. Market participants should monitor further ECB commentary and US-EU growth data for direction.