According to Francesco Pesole at ING, the EUR/USD currency pair's recent break below the 1.140 level has resulted in what ING describes as a 'stretched undervaluation' relative to their short-term fair value model. This undervaluation is attributed to short-term rate differentials that have shifted in favor of the euro, which has helped offset the negative impact from declines in equities and oil prices [1].
Pesole notes that the recent movement in EUR/USD was entirely driven by the US dollar. Additionally, eurozone Purchasing Managers' Index (PMI) data surprised to the upside, with services rising sharply, which provided marginal support to the euro against some other currencies [1].
Despite the lack of clear technical support for EUR/USD until the June lows (where intraday spot reached 1.1325-1.1330), ING cautions that attempting to buy the euro at these levels remains risky. However, ING does not anticipate a break into new lows unless the short-term rate differential moves further in favor of the US dollar [1].
Looking ahead, ING expects the EUR/USD pair to ultimately converge toward the 1.1430–1.1450 range, which they view as more consistent with current market conditions [1].
CONCLUSION
ING analysts believe that while EUR/USD is currently undervalued and faces technical risks, the downside is limited unless US dollar rate differentials widen further. The pair is expected to eventually move back toward the 1.1430–1.1450 range, reflecting a more balanced market outlook.