A bit more room for a EUR correction

Written on 07/20/2023
Team UCapital 24

EUR/USD has slipped back to the 1.1200 level, but remains around 2.5% overvalued according to our short-term financial fair value model. A key input to the model, the two-year EUR-USD swap rate gap, has rewidened (in favour of the dollar) to pre-US CPI levels, now hovering around -115/-120bp. On Friday, it had shrunk to -100bp, the tightest since late May.

Today, the Eurozone calendar includes consumer confidence figures for July, with consensus expecting a virtually unchanged read from last month. Yesterday, the Eurozone final core inflation printed 5.5% versus the preliminary 5.4%. Still, media reports that Governing Council members are planning to soften their tone on forward guidance as they hike by 25 bps next week suggests – as also hinted in recent remarks – that concerns on inflation may have eased slightly.

ING's analysts think EUR/USD is more likely to ease back from these levels than jump back higher. A test of 1.1100 in the coming days would be in line with a re-connection with its short-term fair value.