Euro: Downside risks against US Dollar into ECB and Fed – ING

ING’s Francesco Pesole notes that stronger second-quarter Eurozone growth and resilience to geopolitical and commodity shocks have kept the Euro (EUR) relatively expensive. However, he maintains a short-term downside bias in EUR/USD driven by expectations of a September Fed hike and worsening Eurozone terms of trade, seeing a move towards 1.150 over coming weeks as a realistic scenario ahead of a potentially dovish European Central Bank (ECB) meeting.

Euro resilience but softer path seen

"Second-quarter eurozone growth was revised up from 0.4% to 0.6% QoQ, driven by stronger Irish growth on the back of robust multinational performance."

"More broadly, Europe’s resilience despite geopolitical developments and higher commodity prices remains a key theme of the summer and has likely helped keep the euro relatively expensive."

"Our short-term downside preference in EUR/USD is still mainly driven by our USD view and expectation of a September Fed hike. That said, the latest rise in energy prices adds further support."

"Real-time estimates suggest the eurozone’s commodity terms of trade are now worse than at the previous low in March."

"Ahead of Thursday’s ECB meeting, we see some dovish risks given the market’s aggressive tightening expectations. In that context, a move towards 1.150 over the coming weeks remains realistic in our view."