EUR: Still quite overvalued - ING

EUR/USD briefly printed below the 1.120 support in early trading. Should Bessent feed markets with convincing headlines on US-China talks today, a decisive break lower looks on the cards, ING's FX analyst Francesco Pesole notes

Trump pressures Russia to agree to agree to a 30-day truce

"The pair is trading 3% off its 21 April peak, but remains around 3% overvalued according to our short-term fair value model. That misvaluation is largely justified by the short-term rate differentials, which continue to heavily favour the dollar. The current EUR/USD two-year swap rate spread of -170bp coincided with EUR/USD trading around 1.06 or below before Liberation Day. While it's clear that spread is not the main driving force in current FX trading, further material de-escalations in trade wars and signs of resilience among US consumers despite tariffs can compress that risk premium further."

"As mentioned in the USD section, we think risks are slightly skewed to a weaker dollar today as Bessent delivers his update on China. That may help strengthen the EUR/USD support around 1.12 while awaiting new trade and macro developments from the US. Anything happening in the eurozone on the macro side remains a secondary driver, although the ZEW surveys tomorrow can have some FX impact."

"Geopolitical developments are also being monitored this week, although markets have now shown some reticence towards pricing in optimistic scenarios on Russia-Ukraine peace talks until some material progress is made. Trump has ramped up pressure on Russia to agree to a 30-day truce, and Ukrainian President Volodymyr Zelenskyy said he'll be 'waiting for' Putin in Turkey on Thursday. A breakthrough in peace negotiations will be beneficial for EUR/USD, but the extent of the impact will be highly dependent on the market's assessment of the sustainability of any truce. There is a tangible chance markets will lean on the cautious side here."