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ING Holds 1.16 EUR/USD Year-End Target, Citing Parallel Fed-ECB Policy Paths
Summary
ING maintains its 1.160 year-end forecast for EUR/USD, even after predicting an additional ECB rate hike, citing market pricing of similar monetary policy paths for both the Federal Reserve and the European Central Bank.
ING has maintained its year-end forecast for the EUR/USD exchange rate at 1.160, according to a note published Wednesday. The bank's target remains unchanged despite a revision to its European Central Bank (ECB) outlook, which now includes an additional interest rate hike in December.
Symmetrical Rate Expectations
The decision to hold the forecast steady stems from the observation that financial markets are pricing in nearly identical monetary policy tightening for both the U.S. and the Eurozone. ING noted that front-end swaps for both the euro and the U.S. dollar show similar pricing, with markets anticipating 33-37 basis points of hikes by year-end and 80-90 basis points by July.
ING's own house view is that both the Federal Reserve and the ECB will deliver just one more rate hike this year before entering an extended pause. The bank anticipates this will lead to a "dovish repricing of similar magnitude" for both central banks.
Tailwinds for the Euro
Such a dovish repricing is expected to support a slightly higher EUR/USD, as lower U.S. dollar interest rates tend to boost global risk sentiment, which can weigh on the greenback. This scenario, alongside a potential decline in energy prices, is seen as a key positive factor for the currency pair's performance.
Lower energy costs, in particular, would represent a significant positive development for the euro, according to the bank. The combination of these factors underpins the forecast for a stronger euro against the dollar into the end of the year.
AdNear-Term Risks Remain
Despite the positive medium-term outlook, ING analysts see mostly downside risks for EUR/USD in the near term. A retest of the June lows in the 1.1320-1.1330 range could become a realistic possibility under specific conditions.
This downside scenario would likely require two catalysts:
- Brent crude oil prices moving back toward $110 per barrel.
- Markets increasing the priced-in probability of a Federal Reserve rate hike in October.
However, ING clarified that its short-term fair value model does not currently support such a significant downward move for the pair.
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