ING FX analyst Francesco Pesole attributes the recent drop in EUR/USD to widening swap rate differentials reflecting diverging policy expectations between the Federal Reserve and the European Central Bank. While the pair is expected to rebound in the short term, Pesole suggests that the euro remains unattractive in the long run, potentially requiring another leg down before a recovery.
The 4Q24 drop in EUR/USD was primarily driven by the widening in the short-dated swap rate differential due to diverging policy expectations between the Federal Reserve and the European Central Bank , ING’s FX analyst Francesco Pesole notes. EUR/USD set to rebound short-term“Over the Christmas holiday period and in particular, in yesterday’s trading session, the EUR/USD decline accelerated in spite of a re-tightening in the EUR:USD two-year swap rate gap from 200bp to the current 185bp.
5% below its short-term fair value, therefore displaying a risk premium associated with growth concerns for the eurozone.”“Aside from the implications of expected US protectionism under Trump, we think pressure is being added by the rise in TTF gas prices to 50 EUR/MWh caused by Ukraine’s pipeline shutdown. The pound was the worst performer yesterday, and it is probably not a coincidence that GBP is the most negatively correlated with gas in the G10.
EUR/USD Federal Reserve European Central Bank Swap Rates Forex
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