EUR: At fair value - ING

The eurozone calendar is empty until Friday's PMI and EUR/USD moves will primarily depend on market sentiment about the US credit market. What is important to note is that EUR/USD is spot on its short-term fair value (1.167) despite the recent rally, ING's FX analyst Francesco Pesole notes.

This week's focus should stay on the US

"That is partly because the starting point of a week ago was one of moderate undervaluation, but also because US lending condition fears go hand in hand with dovish repricing in Fed expectations. The EUR:USD two-year swap rate gap tightened sharply to 104bp before re-widening to 110bp after Friday's risk re-rating. But it remains some 4-5bp tighter than a week ago and 7-8bp tighter than the start of October."

"The calm on the French political side allowed the euro to recover a bit, but it's hard to get too comfortable with France. S&P downgraded the country from AA- to A+ in an unscheduled move on Friday, despite a draft budget providing for a deficit reduction having been released. The decision to freeze the pension reform complicates budgetary decisions ahead, even if it allows a temporary political reprieve. And the budget discussions are set to intensify in the coming days and weeks. Given the fragility of the government, it remains too early to price out the French effect from the euro fully."

"But this week the focus should stay on the US, and a further souring of credit sentiment could send EUR/USD on a path to 1.180."