Market brief
Euro Breaks Below 1.140 as ING Calls the Move Stretched Undervaluation
The slide was dollar-driven and short-term rate differentials have moved the euro's way, but with no clear technical floor until June's 1.1325-30 lows, ING says only a wider rate gap would open the door to new lows.
By PREVICT Research
Key points
- The euro's break below 1.140 leaves it below ING's short-term fair-value estimate, which the bank describes as stretched undervaluation.
- Short-term rate differentials moved in the euro's favor even as the pair fell, with the drag on fair value coming from lower equities and oil prices — the decline itself was dollar-driven.
- ING sees no case for a break to new lows unless the short-term rate differential widens toward the dollar, and expects the pair to converge back to 1.1430-1.1450.
The euro has fallen through 1.140 against the dollar, a level that ING's short-term fair-value model reads as stretched undervaluation for the single currency, the bank said, arguing the move reflects dollar strength rather than a deterioration in euro-area fundamentals.
The decline was driven by the dollar rather than by euro-specific weakness, and short-term rate differentials shifted in the euro's favor over the same period. That rate support offset the negative effect that weaker equities and oil prices had on ING's fair-value estimate, leaving the spot rate below the level the model considers consistent with current conditions.
Euro-area survey data offered partial support: PMI readings surprised to the upside, with services activity rising sharply, which gave the euro a marginal lift in some crosses even as it fell against the dollar.
On the charts, the bank sees no clear technical support until the June lows, where intraday spot traded at 1.1325-30, a gap it says keeps the risk of catching a falling knife elevated for now.
ING does not see the conditions for a break into new lows unless the short-term rate differential widens in the dollar's favor, and it puts the level more in line with the current environment at 1.1430-1.1450, expecting the pair to converge toward that area over time.
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