ING: Gauging EUR/USD Downside Risks In A Bearish Bond Market

ING write “while we do see risks of U.S. back-end yields staying high, and cannot exclude a 5.0% scenario for the 10-year tenor, additional bearish pressure at the shorter end of the USD curve may be curbed.”

• “A look at recent EUR/USD correlations suggests that the pair has responded to back-end U.S. yields just as much as short-term swaps. All in all, we estimate $1.02 as the most likely bottom for EUR/USD in a scenario where the US bond sell-off continues.”
• “Our baseline scenario in the medium term, however, signals the opposite.”
• “We sit on the more dovish end of the spectrum when it comes to Fed expectations and therefore expect a dovish repricing to drive a USD decline in 2024.”
• “In the short-run - i.e. until U.S. data turns negative - the growth differential between the eurozone and the U.S., a lingering high real USD rate and an unstable risk environment point to a downward-tilted balance of risks for EUR/USD.”
• “We think $1.05 may be the bottom for the pair in current conditions, but as discussed, a drop all the way to $1.02 cannot be excluded.”