Title: EUR/USD Trading Deep in Undervaluation Zone, Says ING
Original Author: Eren Sengezer | Source: FXStreet
The euro has been under persistent selling pressure against the US dollar in recent months, pushing the EUR/USD currency pair well below its long-term fair value, according to a recent research note from ING. In this analysis, ING outlines the macroeconomic, valuation, and geopolitical factors contributing to continued euro weakness, while also presenting a cautiously optimistic forecast for a medium-term recovery.
In this article, we explore ING’s outlook for the EUR/USD exchange rate, key drivers behind the current undervaluation, and what investors can expect over the coming months.
Current Market Overview
– As of early November 2025, EUR/USD is trading around the 1.06 level, reflecting a significant depreciation from levels seen earlier in the year.
– The euro has weakened broadly across major currency pairs, but the drop against the US dollar is especially notable.
– ING analysts believe that this depreciation has now pushed EUR/USD into “deep undervaluation” territory when compared to long-run fair value estimates.
What is Driving the Undervaluation?
According to ING, a number of intersecting factors have been behind the euro’s slide and EUR/USD’s current undervaluation:
1. Persistent US Dollar Strength
– Undoubtedly, a key component of EUR/USD’s decline is the overall strength of the US dollar.
– The dollar has benefited from safe-haven demand amid global economic uncertainty, as well as relatively firm US economic data.
– A delayed adjustment in Federal Reserve policy expectations has also supported a stronger dollar.
– US interest rates have remained higher for longer, increasing the attractiveness of dollar-denominated assets among global investors.
2. Interest Rate Differentials
– Monetary policy divergence between the European Central Bank (ECB) and the US Federal Reserve continues to be a major headwind for EUR/USD.
– The Federal Reserve has kept short-term interest rates at elevated levels due to persistent inflationary pressures and better-than-expected economic growth.
– In contrast, the ECB has turned more dovish, pushing down rate expectations and making euro-denominated assets relatively less appealing.
– The widening gap in interest rate expectations has reinforced capital flows out of the eurozone and into the U.S., supporting the dollar.
3. Weak Eurozone Economic Data
– European economic indicators have consistently surprised to the downside in recent months.
– GDP growth in major eurozone economies like Germany and France has slowed notably, weighed down by weak industrial production, subdued business sentiment, and reduced external demand.
– Inflation in the euro area has also decelerated faster than in the US, giving the ECB more room to pause or even consider trimming rates.
– These developments have led markets to reassess the eurozone’s economic prospects, reducing support for the euro.
4. Geopolitical and Energy Risk Premia
– While not as acute as in early 2022, geopolitical tensions and residual concerns around energy supply still weigh on the euro.
– The Russia-Ukraine conflict remains unresolved, and associated risks have led to caution among investors concerning the European outlook.
– Europe’s dependency on natural gas imports and potential price volatility during the winter months can affect confidence in the eurozone’s stability and predictability.
Valuation Analysis
ING applies a variety of valuation metrics to estimate EUR/USD’s fair value. One of the key tools used by ING’s FX strategy team is the Behavioral Equilibrium Exchange Rate (BEER) model, which incorporates macroeconomic fundamentals such as productivity differentials, terms of trade, and external balances.
Key valuation insights from ING’s analysis:
– ING’s internal fair value model suggests EUR/USD should trade around 1.15 based on medium-term fundamentals.
– At the current EUR/USD exchange rate of 1.06, the pair is trading nearly 8 percent below this fair value estimate.
– From a historical standpoint, this level of deviation from fair value is notable and typically signals
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