Euro Faces Downside Bias Ahead of ECB Meeting

ING's Francesco Pesole believes that despite stronger second-quarter Eurozone growth and resilience to geopolitical and commodity shocks, the Euro (EUR) remains relatively expensive. However, he maintains a short-term downside bias in EUR/USD due to expectations of a September Federal Reserve hike and worsening Eurozone terms of trade.

The Eurozone's economic growth was revised up from 0.4% to 0.6% quarter-over-quarter, driven by stronger Irish growth on the back of robust multinational performance. The resilience of Europe in the face of geopolitical developments and higher commodity prices has likely contributed to the Euro's relatively high value.

Real-time estimates suggest that the eurozone's commodity terms of trade are now worse than at the previous low in March, with rising energy prices adding further support to the downside preference for EUR/USD. Ahead of Thursday's European Central Bank meeting, Pesole sees some dovish risks given the market's aggressive tightening expectations.