**EUR/USD Outlook: ING Expects Stronger Euro Amid Fed and ECB Divergence**
*Original analysis by Francesco Pesole, sourced via Forex Factory*
The EUR/USD currency pair has been in focus for traders, investors, and policymakers alike, particularly due to shifting monetary policy dynamics between the U.S. Federal Reserve (Fed) and the European Central Bank (ECB). According to ING’s latest currency outlook authored by strategist Francesco Pesole, the euro could gain substantial ground against the U.S. dollar in the coming months, potentially rising above the 1.10 level.
This comprehensive analysis explores the rationale behind ING’s forecast, which is underpinned by expectations of diverging interest rate trajectories between the two central banks, evolving economic data, and broader macroeconomic developments.
## 1. Overview of Existing Market Sentiment
Market sentiment over recent months has been largely driven by central bank policy expectations and data releases. As central banks approach the tail end of their tightening cycles, participants are increasingly focusing on forward guidance and inflation dynamics.
– The EUR/USD pair has traded in a relatively narrow range recently, reflecting a lack of directional conviction.
– Currency volatility has also remained subdued, with traders awaiting clearer signals from both the Fed and the ECB regarding the future path of interest rates.
– While rate cuts are anticipated in both regions, there is a growing belief that the Fed may ease more substantially and earlier than the ECB.
## 2. Central Bank Policy Divergence
At the heart of ING’s projection is the anticipated divergence between the U.S. Federal Reserve and the European Central Bank in their approaches to monetary policy over the coming quarters.
### Expectations for the U.S. Federal Reserve
– ING anticipates that the Fed is nearing the end of its interest rate hiking cycle.
– Markets are increasingly pricing in a more dovish stance by the Fed, with potential rate reductions expected before the end of 2024.
– Slowing inflation and signs of moderating U.S. economic growth support this view.
– The Fed’s communication has started to reflect increased concerns about overtightening rather than inflation persistence.
### European Central Bank Trajectory
– In contrast, the ECB is expected to maintain a somewhat firmer stance on policy normalization.
– Core inflation in the euro area remains elevated, keeping pressure on the central bank to retain restrictive monetary policy.
– ING notes that the ECB is less likely to front-load rate cuts compared to the Fed, which could provide support for the euro.
The expected policy asymmetry could contribute to a widening EUR/USD rate differential, favoring euro strength against the dollar.
## 3. Reassessing Rate Cuts: Market Mispricing?
Francesco Pesole emphasizes that the current pricing of rate cuts may be underestimating the ECB’s caution and overestimating the Fed’s urgency. This disconnect presents an opportunity for EUR/USD upside if expectations are recalibrated.
– Market-implied pricing currently reflects around 100 basis points of Fed rate cuts within 12 months.
– ECB rate cut expectations are more muted, at approximately 75 basis points over the same period.
– According to ING, this pricing may shift in favor of the euro if the ECB holds rates higher for longer while the Fed initiates earlier cuts.
## 4. Euro Area Economic Indicators
ING’s projection also considers recent macroeconomic data from the eurozone, which—despite showing some softness—is not weak enough to justify aggressive rate cuts in the near term.
– Leading indicators such as the composite Purchasing Managers’ Index (PMI) suggest stability rather than deterioration.
– German industrial production has shown signs of a rebound, offering positive momentum for Germany, the zone’s largest economy.
– Inflation in the services and wage components of the consumer price index remains sticky, reinforcing the ECB’s cautious stance.
– Though challenges linger, including weak consumer demand and lingering post-COVID shocks, the resilience of inflation may dissuade premature policy easing.
In this context, the euro may find
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