ING Comments on Euro, Other European Currencies

The euro is proving the surprise beneficiary of the trade-driven sell-off in risk assets, said ING.

Normally, has a strong positive correlation with risk assets, whereas this week, the euro has been holding its own, wrote the bank in a note. That has nothing to do with a positive reassessment of eurozone growth prospects.

No, the news there is terrible and could get worse should European Union trade officials — meeting on Monday in Luxembourg— decide to retaliate, stated ING. It's really only the trade blocs of the EU and China that have the economic muscle to retaliate.

Instead, the bank believes it's the alternative liquidity offered by the euro. No doubt this is something European policymakers are keen to explore — and ING will be writing on the subject over the coming weeks on what needs to happen to make the euro a more attractive asset for foreign exchange reserve managers.

For , there is some massive trend resistance in the 1.11-1.12 area — marking its bear trend off its 1.60 high in 2008. ING will probably need to see another big move lower in United States equities to take out that area near term.

However, the bank suspects buyers will emerge in the 1.1020 as doubts continue to grow about a sea-change in the US dollar's (USD) pre-eminent position as a store of value.

Over recent months, has tended to sell off on tariff-related headlines, given that the eurozone is far more exposed to U.S. trade than the United Kingdom, pointed out ING. Yet surprised on Thursday and spiked higher.

Two factors are at play, the bank thinks. The first is that the euro has better liquidity than sterling (GBP) and will benefit more as investors leave the US dollar. The second is that the looming global trade war is proving the greater leveller for rate spreads. The 'exceptionalism' of high U.K. interest rates is being unwound, where U.K. two-year swap rates fell 12bps more than their eurozone counterpart Thursday. This may be a dominant theme in the near term.

0.8475 is decent resistance for , above which 0.8550 will be the target. Sterling is also a liquid reserve currency so it can benefit from the shift away from the US dollar. However, has come a long way in a short period of time and may be due for some consolidation in the 1.30-32 area, added the bank.

Thursday's Central and Eastern Europe (CEE) region reaction to the U.S. move triggered a strong dovish repricing in rates across the board, and foreign exchange came under pressure as expected.

ING's preference worked well and Poland's zloty (PLN) underperformed CEE peers, supported by a dovish turn by the governor of Poland's central bank (NBP) indicating possible rate cuts possibly as early as the next meeting in May, which is now ING's baseline.

ING believes the divergence between the hawkish Czech central bank (CNB) and dovish NBP will continue and sees heading further down.

Overall, however, ING thinks some pressure on CEE foreign exchange will remain in the days ahead but should generally be dampened by higher and a rally in EUR rates, leading to little change in the CEE region's interest rate differential.

The euro is proving the surprise beneficiary in the aftermath of U.S. President Trump's announcement of sweeping trade tariffs late on Wednesday as investors pull out of risky assets and out of the dollar, ING analyst Chris Turner says in a note. The "alternative liquidity offered by the euro" as investors pull out of the dollar is the likely reason behind the euro's gains. This is despite a potentially substantial hit to the eurozone economy from the tariffs. The euro has even held its own against the safe-haven yen, he says. The euro falls 0.4% to $1.1013, having hit a six-month high of $1.1148 on Thursday, according to FactSet. (emese.bartha@wsj.com)

has softened going into Wednesday's United States tariff event, but price action suggests strong buying interest below 1.080, in another sign that markets aren't ready to adopt a negative, tariff-led euro narrative, said ING.

The bank has been making the case that the euro should embed more tariff downside risks. ING's models suggest that at 1.080 there is no risk premium for .

Should a 20% carpet U.S. tariff materialize, the argument for a decline will become more compelling, but perhaps the bank needs to see even tougher targeting of European Union products or countries to dent the euro's relatively safe status against other high-beta currencies.

Outside of Wednesday's reaction, which may well be EUR negative, things will be more nuanced, stated ING. The European Central Bank may surprise on the hawkish side with a hold in two weeks, and the continuous rotation from U.S. to European assets could also continue to fuel EUR demand.

The bank still likes a decline in and has 1.070 as a target, but it doubts that would be a straight line even if the U.S. surprises with a more aggressive tariff announcement.

The United Kingdom's goods exports to the U.S. are worth just below 2% of gross domestic product compared with 3% for the eurozone. It is no massive difference, but the EU has been much more in the focus of President Donald Trump's confrontational international approach, pointed out ING.

In particular, Trump explicitly opened to a trade deal with the U.K. in previous months, putting British exports at the front of potential exemptions should negotiations follow Wednesday's announcement. The more markets will see room for the initial tariff announcement being watered down via negotiations, the more sterling can outperform the euro.

The bank mostly sees downside risks for in the near term, with a move below 0.830 very much possible. In the longer run, there will be room for a rebound as the Bank of England rate expectations can be repriced lower.

The only event in the Central and Eastern European (CEE) region on Wednesday is the meeting of Poland's central bank (NBP), which is likely to leave rates unchanged again at 5.75%, added ING. The central bank released its new forecast at the March meeting, so no action here and the statement probably doesn't have much potential to surprise either.

However, after surprisingly low inflation numbers in recent months, the latest released this Monday, the bank sees some likelihood that someone from the dovish camp could suggest a rate cut. It's hard to find a majority for that proposal at this point, but even the motion itself would be a turning point for markets.

As always, Thursday will be followed by the governor's press conference, which is likely to continue the hawkish tone markets saw in March.

Markets have moved into full dovish mode over the past few weeks and Tuesday ING saw another drop across the rates and bonds curve. The market at this point is pricing in roughly 115bps of rate cuts this year and a terminal rate somewhere near 4%.

This is a bit more than ING expects in its forecast, but it's still a possible scenario. At the same time, if the bank sees a motion for a rate cut, markets will likely start pricing more rate cuts.

As a consequence, ING estimates the balance of risks on the dovish side despite the press conference being hawkish in tone. This is building the risk of further weakness for the zloty (PLN) and the bank still sees above 4.200.

However, as across CEE, the focus will be on the U.S. tariff story today, which is likely to dominate unless markets see some surprises in Poland.

The euro has remained rather resilient to the whole United States tariff story, wrote ING in a note to clients.

Despite the European Union being among the biggest victims of this week's round of tariffs, European currencies are faring much better than China proxies or the Canadian dollar, with trading briefly below 1.080 on Monday before revering later in the session, noted ING.

What also may have helped the euro is a Bloomberg report suggesting that more European Central Bank officials are ready to accept a pause in April, stated ING. There is a possibility that the ECB tipped the media as policymakers were uncomfortable with markets pricing in over 20bps of easing for the April meeting early Monday.

The ECB probably wants to avoid a situation where it is led by market pricing to take a decision — cut — with the alternative — hold — being delivered a blow to an already turbulent bond market, pointed out the bank.

Anyway, the implied probability of a cut as of this morning is still high (74%). We'll see what the flash CPI report for March tells us today, but the indications were modestly dovish from Germany yesterday and the consensus is for a decline from 2.6% to 2.5% in core eurozone inflation.

Earlier Tuesday, eurozone inflation ticked down from 2.3% year to year to 2.2% in March. This wasn't just on lower energy prices, but also a pronounced decline in services inflation. Even though the latter is in part driven by a late Easter, the decline is a dovish sign for the ECB ahead of possible trade upsets to the inflation outlook, added ING.

Markets are already pricing in 100bps reactions this year at Poland's central bank (NBP), with the first cut of 50bps in July, according to ING. So markets are already in the bank's baseline scenario with more cuts early on.

Still, the rate cut proposal would have signalled importance to the markets, and ING can price in more cuts even if they are not delivered later. As a consequence, Wednesday's policy meeting creates downside for the zloty (PLN).

Monday's contradictory direction of PLN rates versus the EUR already points to a weaker currency, in part due to hawkish headlines from the ECB. As a consequence, ING looks above 4.20 .

at 1.084 days before the United States is expected to announce harsh tariffs on the European Union is a testament to the foreign exchange market's hyper forward-looking tendency, said ING.

The drivers of the pair's rally have been a re-rating of EU growth expectations based on fiscal spending, and pessimism on U.S. activity, wrote the bank in a note. Neither of those factors has been endorsed by hard data just yet, and ING remains reluctant to chase higher into the tariff announcement.

The bank's models suggest continues to trade around 0.5% above its short-term fair value, and at -155bps, the two-year swap rate gap remains too wide to justify 1.09-1.10.

For a sustainable decline in , the US dollar (USD) needs domestic support through data stabilization, but the euro (EUR) equally seems to be embedding too much optimism, and ING's preference remains for a weakening in the pair in the coming weeks. Should the U.S. opt for high tariffs on all EU products this week, could be driven back towards the 1.070 support.

The bank will watch as another key gauge of tariff risk.

On the data side, Germany releases consumer price index figures for March on Monday. ING's call is for a slowdown from 2.3% year over yearto 2.2%, in line with consensus. The same numbers are expected for the eurozone-wide flash CPI on Tuesday.

Central and Eastern European (CEE) currencies have once again been caught in the clash between hawkish central banks, supporting stronger foreign exchange and negative global risks, and undermining currencies in the region, according to ING. Rate differentials tightened across the board in the second half of last week, implying stronger foreign exchange.

However, only Poland's zloty (PLN) followed, while Hungary's forint (HUF) weakened to its weakest levels since early March, and the Czech koruna (CZK) remains little changed.

Given the noise around U.S. tariffs last week and this week, global developments in the coming days will be the main driver, added the bank.

However, unless tariff headlines surprise in a significantly negative way, ING prefers to stay on the bullish side this week for CEE currencies, where the bank sees more room for surprises, given that a large degree of negativity is priced in at the moment while the local story supports foreign exchange.

held up surprisingly well on Thursday — as did European automakers, noted ING.

The Eurostoxx autos and parts index only fell 1%, either because United States auto tariffs were priced in or the view that they would be negotiated away, wrote the bank in a note to clients. Price action Thursday could be a precursor to next Wednesday, when the euro could take a hit once 20% across-the-board U.S. tariffs are potentially levied on the European Union.

Notably, ING is seeing some longer-term bullishness in the foreign exchange options market. Despite the spot having come steadily lower over the last week, the foreign exchange options market has seen increasing demand for longer-term euro call options. For example, the one-year risk reversal skew — the price for a euro put option over a euro call option — has decreased to 0.34% from 0.66% over the last week. This one-year skew shifting in favor of euro calls was last seen in 2020 and would be a big talking point, stated the bank.

For Friday, there's some French and Spanish inflation data and the European Central Bank survey on inflation expectations.

in theory should look vulnerable to a sticky U.S. inflation print on Friday. But ING suspects the 1.0730 area holds, and ending the day at 1.0830/50 would tell the bank something about declining appetite for US dollars.

Another decent month for the United Kingdom retail saw sales up 1%, having risen 1.4% last month — these are volume figures, so inflation adjusted, pointed out ING. It's unusual to have two such strong months in a row, given this is a volatile data set — though it was equally strange to see four consecutive falls through the final months of 2024, given real-wage growth is so strong in the U.K. — 6% wage growth, 2%-3% inflation.

So, the bank thinks what markets are seeing is a catch-up in the data to the probable underlying trend.

Sterling (GBP) has strengthened a little further on Friday's retail sales figures. 0.8320 is clear support, below which it looks biased towards 0.8250. Next week will be dominated by the U.S. tariff story, and tariffs are negative, added ING.