EUR/USD's Downside Risks Shrink as Undervaluation Fades

EUR/USD's recent drop below 1.14 has put pressure on the pair's undervaluation, according to ING's short-term fair value model. The model suggests that despite a negative impact from lower equities and oil, rate differentials have moved in favor of the Euro.

Francesco Pesole at ING attributes the move to dollar-driven forces, with no clear technical support until the June lows around 1.1325-30. While this makes it 'risky' to catch a falling knife, Pesole doesn't see conditions for new lows unless short-term rate differentials widen in favor of the USD.

ING expects EUR/USD to converge towards the 1.1430-1.1450 area rather than new lows.