EUR/USD: Downside risk to 1.160 on oil shock – ING

ING’s Francesco Pesole sees the Euro vulnerable when Oil rises, despite some support from risk-off flows and its safe-haven role versus the Dollar. Using a model with 12‑month betas, he links a further Brent rally to EUR/USD downside and notes the pair trades above short-term fair value, arguing that major Iran escalation could push EUR/USD toward 1.160.

Euro seen overvalued versus fair value

"The euro is in a poor spot when oil prices rise. What is partly mitigating losses is probably the associated risk-off in equities and the euro’s recent prominence as a safe-haven alternative to the dollar."

"It’s not easy to estimate the impact on EUR/USD from a further oil rally, given the pair’s reduced sensitivity to oil in the past year. In our current model that takes 12-month rolling betas, another $5 rally in Brent means around 1% lower in EUR/USD, but that correlation often strengthens during oil shocks, and the risks are of an even larger selloff in the pair."

"That is especially true considering EUR/USD is still trading around 1% above a short-term fair value calculated excluding oil prices (so only rates and equities). In our view, this confirms what was discussed in the USD section above – the reluctance to price in geopolitical risks. Intuitively, it means greater downside risks for EUR/USD, which we believe can trade all the way down to 1.160 in a major escalation."

"On the macro side, we have eurozone PMIs today. The disappointing ZEW index this week has probably curbed some enthusiasm for today’s surveys, but the eurozone composite PMI should remain well above 50.0 (expansion/contraction threshold), allowing some mild optimism. The impact on the euro should be limited, in our view."

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