ING: The EUR
The drop in EUR/USD looks too sharp relative to its short-term rate differential. We estimate short-term undervaluation at around 2.1-2.3%, exceeding what has been justified by the French risk premium. That’s mostly because front-end rate differentials have actually tightened on the back of the stock market turmoil, compensating for worsening risk sentiment. Unless risk sentiment faces new instability this week, we expect EUR/USD to make its way back above 1.120. The eurozone data calendar is quite quiet this week, but focus on the European Central Bank's succession story will increase. Today's Eurogroup meeting will discuss the candidacies of Spain’s Pablo Hernández de Cos and the Netherlands’ Klaas Knot, the only two officially running for the role - although last-minute contenders might still emerge. Knot is a hawk and de Cos is a dove, so there should be some reaction accordingly in the euro depending on who ends up taking the role. However, the reshuffle will also involve a broader bargain around the roles of Chief Economist and Executive Board member, currently held by Philip Lane (moderate dove) and Isabel Schnabel (hawk), which will be weighed by markets too. Overall, the i
The drop in EUR/USD looks too sharp relative to its short-term rate differential. We estimate short-term undervaluation at around 2.1-2.3%, exceeding what has been justified by the French risk premium. That’s mostly because front-end rate differentials have actually tightened on the back of the stock market turmoil, compensating for worsening risk sentiment. Unless risk sentiment faces new instability this week, we expect EUR/USD to make its way back above 1.120.
The eurozone data calendar is quite quiet this week, but focus on the European Central Bank's succession story will increase. Today's Eurogroup meeting will discuss the candidacies of Spain’s Pablo Hernández de Cos and the Netherlands’ Klaas Knot, the only two officially running for the role - although last-minute contenders might still emerge. Knot is a hawk and de Cos is a dove, so there should be some reaction accordingly in the euro depending on who ends up taking the role.
However, the reshuffle will also involve a broader bargain around the roles of Chief Economist and Executive Board member, currently held by Philip Lane (moderate dove) and Isabel Schnabel (hawk), which will be weighed by markets too. Overall, the impact on the euro may prove relatively contained and short-lived. There are 21 voting rights for monetary policy decisions at the ECB, and we don’t see any candidate willing to cause seismic changes at this time of elevated uncertainty.