Synopsis:

ING expects EUR/USD to remain under pressure, with the pair likely unable to hold gains above 1.0750 and set to break below 1.0600 in the near term. German political uncertainty, with a possible no-confidence vote and snap elections in early 2024, and dovish ECB expectations are key headwinds.

Key Points:

• German Political Instability: Reports of a potential no-confidence vote in December and early elections in February add to EUR downside, as fiscal shifts in Germany appear unlikely.

• ECB Dovish Outlook: ING anticipates a 50bps rate cut from the ECB in December, greater than the 28bps currently priced by markets, placing more pressure on the eurozone economy to rely on monetary support.

• Wide Rate Differentials: The two-year EUR swap rate differential remains heavily in favor of the USD, currently around 170bps, limiting EUR/USD upside and supporting the USD.

• Near-Term Outlook: ING foresees EUR/USD struggling to maintain levels above 1.0750, with a break below 1.0600 expected as dollar strength persists.

Conclusion:

ING projects further EUR/USD weakness driven by German political risks and a more dovish ECB outlook. With rate differentials favoring the USD, EUR/USD is likely to fall below 1.0600, facing limited upside potential in the current economic and political environment.