Risk premium can widen from here – ING

The shake-up in equity markets and resurging tariff risk are going to be much more relevant for EUR/USD compared to the widely anticipated 25bp cut and quite likely reiteration of a dovish-leaning guidance, ING’s FX analyst Francesco Pesole notes.

Risks shift back to the downside for EUR/USD

“The tariff threat may be perceived more seriously given the Treasury’s active planning, and that materially shrinks the upside potential for the euro. Indeed, outside of a positioning-fuelled USD correction on the back of declining fears of global tariffs, the euro continues to lack any clear domestic bullish driver, as we expect a dovish ECB to confirm this week.”

“Our high-frequency fair value model now shows EUR/USD undervaluation (i.e. tariff-related risk premium) having rewidened from 1% to 1.8% since yesterday morning. That undervaluation peaked at 3.0% in early January, meaning an additional 1%+ drop in EUR/USD regardless of any rates, equity or commodity could be warranted if markets proceed to price in a greater tariff risk.”

“We think the short-term balance of risks has shifted back to the downside for EUR/USD following tariff-related news overnight and a return below 1.040 is warranted at this stage.”