Euro: Fair value drop points to downside against US Dollar – ING

Market impact: Bearish EUR/USD in the near term, but not a decisive long-term bearish signal.

ING’s model-based fair value falling below 1.150 suggests that EUR/USD has lost some of its near-term fundamental support. The main transmission channel is the renewed widening of the two-year SOFR–€STR spread to roughly 150 basis points, which improves the relative carry appeal of the dollar and raises the opportunity cost of holding euros. ING also identifies equities and interest-rate differentials—not oil—as the dominant short-term drivers.

The immediate implication is a higher probability of continued EUR/USD weakness and a potential retest of the June 1.1320–1.1330 area, particularly if US yields remain firm, European equities weaken, or markets reduce expectations for ECB tightening. This is a relative-rates trade: even a hawkish ECB stance may not support the euro if investors believe the Fed will deliver comparable tightening while US rate premiums remain wider.

The signal is less bearish over a medium-term horizon. ING expects only one additional hike from both the ECB and Fed this year, followed by no further tightening in 2027, a view consistent with its 1.160 year-end EUR/USD forecast. That creates a two-stage interpretation: downside risk while current rate differentials and risk sentiment dominate, but possible euro stabilization or recovery if the dollar’s rate advantage narrows or the market begins pricing a more persistent ECB tightening cycle.

A further euro-specific risk is political and fiscal stress in France. The French 10-year spread over German Bunds has reached 100 basis points; continued widening could raise the euro-area risk premium and become an additional source of EUR selling beyond the US-Europe rate gap.

What traders should monitor:

ECB speakers and the eurozone consumer-confidence release for changes in the perceived ECB reaction function; two-year US-versus-euro-area yield spreads; European equity performance; French-German sovereign spreads; and whether EUR/USD holds above or breaks through the June lows. A more hawkish ECB message, narrowing rate differentials, or improving European risk sentiment would weaken the bearish case. Conversely, stronger US data, higher US yields, deteriorating European fiscal headlines, or broad risk aversion would reinforce dollar demand.