EUR/USD: Support holds as Oil shock reprices rates – ING

ING’s Chris Turner reports that EUR/USD held the 1.1500 level despite pressure, with options markets not positioning for a major downside break. He notes that the energy shock has driven a stronger repricing of Euro and Pound rates than US rates, potentially narrowing EUR:USD swap differentials. ING sees 1.1650 as initial resistance, with further gains dependent on ceasefire progress.

Euro holds 1.1500 with limited upside

"The 1.1500 level in EUR/USD withstood some pressure yesterday, but events managed to see it hold. Our FX option traders noted that even with EUR/USD offered early yesterday, the FX option market was not buying into a big downside breakout. Here, the one-month risk reversal, the cost of an EUR put option over an EUR call option, went less bid for EUR puts."

"When the dust settles on this energy shock, we will have a little more time to assess how interest rate markets have reacted. Looking at the OIS forwards market, and in particular the one-month OIS priced one year forward, we can see that something like a 50bp increase has been the average response across the G10 space."

"However, US rates are only up 25bp on the view that this energy shock would not have such a large impact on US inflation. While the reaction in Europe has been larger. Here, EUR ESTR has been marked 65bp higher and GBP OIS a whopping 80bp."

"If the legacy of this oil shock is that EUR:USD two-year swap differentials need to be priced even narrower, then support at 1.1500 in EUR/USD can prove more solid."

"1.1650 is the initial resistance for EUR/USD and it is not clear that EUR/USD needs to rally much more today unless we see some material progress towards a ceasefire."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)