EUR: Dollar Weakness Lifts Euro Modestly Against USD - ING

EUR/USD has maintained a modest upward trend recently, supported by broad dollar weakness. Chris Turner, analyst at ING, noted that despite short-term market volatility, the upcoming August PMI data for the eurozone is expected to show moderate growth, while inflation expectations remain elevated, providing justification for the European Central Bank to continue raising interest rates. At the time of writing, EUR/USD was trading near 1.16928.

**Narrowing Euro-US Yield Differential Provides Support**

Market data shows that the two-year swap spread between the euro and the dollar has narrowed significantly from its earlier highs, becoming a key factor supporting the euro's exchange rate recently. According to ING's observation, the spread has fallen from 113 basis points last Thursday to 83 basis points, reflecting a repricing of market expectations for the policy paths of the two major central banks. The narrowing spread reduces the dollar's relative appeal, providing upward momentum for EUR/USD.

**Diverging Views on Medium-to-Long-Term Outlook**

Regarding future movements, ING holds different assessments across various time horizons. Its FX strategists believe EUR/USD should move higher once the dust settles, forecasting the pair could return to the 1.20 level within the next 12 months. However, the group's FX research team also cautioned that the scope for further dollar weakness may be limited, as macro risks such as tariff threats have not subsided, and investors should not blindly chase euro gains.