EUR: Downside Risks Persist Despite High ECB Hike Expectations - ING

Francesco Pesole, FX strategist at ING, said that despite high market expectations for a December rate hike by the European Central Bank and disruptions in German politics, the firm keeps its EUR/USD year-end target unchanged at 1.160, while stressing that the exchange rate faces sustained downside risks in the near term.

**Hawkish Fed and oil prices weigh on short-term valuations**

Pesole noted that the Federal Reserve's more hawkish-than-expected stance is a key factor pressuring EUR/USD recently. Following the hawkish meeting, the two-year swap spread widened to its widest level since July, directly dragging the exchange rate lower. Meanwhile, elevated energy prices have prompted ING to cut its short-term fair value estimate for EUR/USD to around 1.150. According to the firm's analysis, eurozone-specific factors are unlikely to reverse the current downtrend until a notable pullback in energy prices occurs.

**Lack of effective technical support**

From a technical perspective, ING sees no strong support for EUR/USD until it falls to the 1.132-1.135 area, which corresponds to the previous summer lows. The spot is trading near 1.14809, not far from that support zone. Further adverse moves in front-end rates, oil prices, or global equities could quickly lower the fair value of the exchange rate, keeping downside risks dominant in market sentiment.

**Year-end target unchanged**

Despite the bearish near-term outlook, ING has not adjusted its year-end target for EUR/USD. The firm reiterates that 1.160 remains an achievable target level in the coming months, based on a comprehensive assessment of eurozone economic resilience and the ECB's policy path. However, Pesole cautioned that the path toward that target could be bumpy until energy prices retreat.