EUR: Fully USD-dependent - ING

The eurozone's July PMIs were revised marginally lower yesterday, but that is hardly meaningful for a market that isn't receiving any input from the euro side. EUR/USD remains almost entirely driven by the dollar leg, and we continue to see decent upside potential mostly on the back of the Fed's dovish repricing rather than any supportive eurozone story, ING's FX analyst Francesco Pesole notes.

Near-term target remains 1.17

"Looking only at post-'Liberation Day' trading, EUR/USD looks cheap. The two-year EUR:USD swap rate gap (-140bp) is 5bp narrower than it was at the end of June, when the pair was trading at 1.180. If we broaden the scope, the story is different. In September 2024, the spread was at -85bp, yet EUR/USD traded just below 1.12."

"The force that might be pulling the pair from trading higher could be a partial reassessment of the dollar risk premium, specifically from a growth angle. While the US payrolls now make a September Fed cut more likely, the US-EU trade deal partly dents the euro's attractiveness as an alternative."

"Our view is that markets aren't ready to take that USD risk premium reassessment much further, with Trump's trade policies and his pressure on the Fed keeping the medium-term bearish USD narrative compelling. Our near-term target remains 1.17, and we see further gains later this year, but we have to acknowledge that the EUR/USD's ability to rally within the 1.15-1.20 region is not as smooth as it was a couple of months ago."