EUR: Still rather expensive - ING

EUR/USD received some extra support yesterday from the news that Ukraine agreed to a 30-day truce with Russia, but has retreated from the 1.095 highs to just under 1.090 as the dollar started to recover and the EU announced €26bn worth of retaliatory tariffs against the US. Markets had already largely priced in a Ukraine-Russia peace deal, and while another small leg higher in EUR/USD may be due if and when Russia agrees to the terms of the truce, the pair can face greater upside resistance on the back of stretched technicals, ING's FX analyst Francesco Pesole notes.

A drop to 1.080 is more likely than a rally to 1.10

"Despite the correction overnight, EUR/USD remains around 1.5% overvalued, according to our short-term fair value model. Also, the latest CFTC data show positioning has moved back to neutral territory. Speculative net-shorts accounted for only 1.5% of open interest as of 4 March, down from 11% at the end of February."

"With US core CPI potentially capping dovish sentiment on the Fed today, the two-year EUR:USD swap rate gap may struggle to tighten beyond the -140bp level (now -144bp), and may instead face some rewidening that would make EUR/USD even more expensive at current levels. There is also a risk that either ECB President Christine Lagarde or any of the many other ECB speakers today will sound slightly more dovish after the EU's retaliatory tariff announcement."

"At this stage, we think a drop to 1.080 is more likely than a rally to 1.10 in EUR/USD."