EUR: Not liking the oil rally - ING

The Euro (EUR) generally dislikes geopolitical shocks leading to higher energy prices, and has therefore detached from JPY and CHF in early price action after the Israeli strike on Iran. This is a trigger for an unwinding of stretched longs on EUR/USD, which, according to our model, briefly reached a 2-standard-deviation overvaluation relative to short-term drivers yesterday, ING's FX analyst Francesco Pesole notes.

Return to 1.14-1.15 seems entirely appropriate

"That is just above the 5% misvaluation, which we have assessed as the peak, where further rallies would need to be justified either by a substantial shift in rate differentials (higher EUR short-term rates or lower USD short-term rates) or another material deterioration in the US debt market. That overvaluation sits at 4% after this morning's correction."

"From a European Central Bank perspective, oil market volatility likely endorses its cautious tone on further easing, and potentially pushes the chances of the last 25bp cut of the cycle more to 4Q rather than 3Q - mirroring the current market preference."

"Anyway, we'll likely need to wait for next week's ECB speakers to get a better sense of what this all means for monetary policy. And given the fast-moving geopolitical situation, it is definitely too early to draw conclusions just yet. EUR/USD will likely follow that situation closely and primarily via the oil price channel. But we think the starting point was already quite rich for the pair, and a return to the 1.14-1.15 seems entirely appropriate."