EUR: Don't dismiss downside potential - ING

As investors breathe a sigh of relief after Trump reassured them he is not seeking to remove Fed Chair Powell, the upside potential for EUR/USD has shrunk, EUR/USD has more room to fall, ING's FX analyst Francesco Pesole notes.

A break below 1.130 can open the door for a bigger leg lower

"Our view is that a still fragile dollar requires a constant flow of positive headlines to find additional support. That is no guarantee, but if the US administration is indeed seeking to fuel a market recovery."

"After all, our model still shows the pair is trading close to 3.5% above its short-term fair value. That is, the excess risk premium applied to the dollar after rate and equity differentials are taken into account. An important disclaimer is that the model looks at one-year rolling correlations, and high volatility tends to reduce the explanatory power. That said, we have little doubt the dollar retains a risk premium. Incidentally, positioning data has indicated the euro is the most overbought currency in the G10 after the yen."

"We repeatedly warned our readers that picking a top in EUR/USD throughout this historical rally was risky. We know think the dollar recovery potential shouldn't be underestimated. The 1.130 area is key: in the past couple of weeks, attempted EUR/USD corrections faced heavy buying interest around that level. A decisive break below 1.130 can open the door for a bigger leg lower and probably signal a shift in interest to rebuild some strategic dollar longs."