ING Sees Further Euro Decline Amid Fiscal Stress and ECB Policy Concerns

The Euro staged a recovery on Tuesday after a sharp decline the previous day, but analysts at ING warn that deeper losses may be on the horizon. The EUR/USD exchange rate climbed to 1.1256, up 0.34% on the day, though it remains down 2.50% for September. Despite this rebound, ING maintains a bearish outlook, targeting a drop to 1.1100-1.1120, with a risk of extending to 1.10.

ING's concerns center on Europe's fiscal credibility, which is under pressure from rising public debt levels. France's debt reached 119.0% of GDP in the second quarter, up from 117.5% in the first quarter, raising worries about higher borrowing costs. The stress in European bond markets, particularly French debt, has contributed to a risk premium on the Euro, weakening it against both the US Dollar and other currencies like the Swiss Franc and Pound Sterling.

The fiscal stress is also impacting expectations for European Central Bank (ECB) policy. ING notes that the ECB's expected tightening cycle has been scaled back by 30 basis points since late September, compared to just 13 basis points for the Federal Reserve. This shift reduces the Euro's appeal, as the Fed's policy outlook remains more resilient. The ECB faces a delicate balancing act between controlling inflation and potentially intervening if French debt markets become disorderly.

ING's Chris Turner highlighted the broad selling pressure on the Euro, noting that the decline in EUR/CHF and EUR/GBP pairs suggests a larger risk premium linked to fiscal concerns. The bank maintains its near-term target for EUR/USD at 1.1100-1.1120, with the possibility of further declines to 1.10. The combination of fiscal stress and reduced ECB tightening expectations leaves the Euro's rebound vulnerable to renewed selling pressure.