An even bigger rate gap – ING

EUR/USD below 1.10 appeared to be a matter of when, rather than if, as the short-term USD:EUR gap widens again, notes ING FX analyst Francesco Pesole.

EUR/USD to explore levels below 1.09

“We think 1,100 would have worked as more solid support had we not seen such strong US jobs numbers. Now, we could see some mild support for the pair in the coming days as the Fed and ECB repricing have both run their course, but we believe risks are still tilted to the downside through late October as the ECB is expected to taper. EUR curve should favor dovish bets and other factors may support dollar.”

“The Eurozone data calendar is fairly quiet this week, so more focus will be on ECB speakers. Comments last week by prominent hawk member Isabel Schnabel seemed to suggest that hawks are also concerned about the increase and may eventually give the go-ahead for an October cut. Over the weekend, dovish member Francois Villeroy said an October cut was likely.

“However, the consensus has already mapped out the ECB’s easing path and markets are now fully aligned with it, pricing in 23bp easing for next week and another full 25bp cut in December. We struggle to see rate expectations moving well ahead of the October 17 meeting – and barring a drop in US data, the 2-year USD:EUR swap rate spread will not narrow significantly from the current 125bp. This rate differential is consistent with explorations below 1.09 in EUR/USD.”