The shake-up in equity markets and resurging tariff risk are going to be much more relevant for EUR/USD compared to the widely anticipated 25bp cut and quite likely reiteration of a dovish-leaning guidance, ING's FX analyst Francesco Pesole notes.
"The tariff threat may be perceived more seriously given the Treasury’s active planning, and that materially shrinks the upside potential for the euro. Indeed, outside of a positioning-fuelled USD correction on the back of declining fears of global tariffs, the euro continues to lack any clear domestic bullish driver, as we expect a dovish ECB to confirm this week."
"Our high-frequency fair value model now shows EUR/USD undervaluation (i.e. tariff-related risk premium) having rewidened from 1% to 1.8% since yesterday morning. That undervaluation peaked at 3.0% in early January, meaning an additional 1%+ drop in EUR/USD regardless of any rates, equity or commodity could be warranted if markets proceed to price in a greater tariff risk."
"We think the short-term balance of risks has shifted back to the downside for EUR/USD following tariff-related news overnight and a return below 1.040 is warranted at this stage."
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