The euro is heading into a crucial week with more room to fall than to rise, and analysts at ING now see a slide toward the 1.150 level as a realistic scenario over the coming weeks, with both a European Central Bank meeting and a Federal Reserve decision on the calendar.
A Dollar Story More Than a Euro Story
ING's near-term bearish tilt on EUR/USD is not really about weakness in the eurozone economy. The bank's own analysts have flagged that the pair's downside bias is still mainly driven by the view on the US dollar itself, and in particular by the expectation that the Federal Reserve will raise interest rates in September. A rate hike from the Fed typically makes dollar-denominated assets more attractive to investors, pulling capital away from the euro and other currencies and pushing EUR/USD lower.
Adding to that pressure, ING points out that the latest jump in energy prices is providing extra support for the case of a weaker euro. Rising energy costs tend to hurt energy-importing regions like the eurozone more directly, worsening their trade position and adding another reason for the currency to soften against the dollar.
Eurozone's Trade Position Worsens
That energy squeeze is already showing up in the numbers. Real-time estimates tracked by ING suggest the eurozone's commodity terms of trade, essentially the price gap between what the region exports and what it has to pay for the commodities it imports, have now slipped to a level worse than the previous low recorded in March. A deteriorating terms of trade position means the eurozone is effectively paying more for the raw materials and energy it buys from abroad relative to what it earns from what it sells, a dynamic that weighs on the currency over time.
Growth Was Revised Higher, But It Isn't Enough
The eurozone did get one piece of encouraging data. Second-quarter growth for the bloc was revised up from an initial 0.4% quarter-on-quarter reading to 0.6%, with the improvement traced back to stronger growth in Ireland, itself powered by a robust performance from multinational companies based there. Even so, that upward revision has not been enough to change ING's short-term call on the euro, since the dollar side of the equation, tied to Fed policy expectations and energy costs, is doing most of the work in the current outlook.
Dovish Risk Looms Over Thursday's ECB Meeting
The next big test for the euro comes at Thursday's European Central Bank meeting. ING sees a real chance of a dovish outcome, arguing that markets have been pricing in aggressive tightening expectations that the ECB may not fully validate. If policymakers push back against that aggressive pricing, it would reinforce the case for further euro softness. As ING put it, "a move towards 1.150 over the coming weeks remains realistic in our view."
Australian Dollar Extends Gains, Yen Keeps Dollar in Check
Elsewhere in currency markets, the Australian dollar was trading above 0.7200 during Tuesday's Asian session, its highest level since May 14. The broader US dollar has been under pressure as a rallying Japanese yen outweighs support the greenback might otherwise get from hawkish Fed bets and ongoing geopolitical tensions. Firming expectations that the Reserve Bank of Australia will deliver another rate hike later this month are also acting as a tailwind for the Aussie, though mixed trade balance data out of China kept the pair's gains in check.
The US dollar's move against the Japanese yen told a different story. USD/JPY rebounded from a six-month low touched below 153.00 earlier in the day to trade back above 154.00 in the second half of the session. Even so, the recovery looked more like a technical correction than a change in trend, since upbeat Japanese wage growth data and an upward revision to Japan's second-quarter GDP have reinforced bets that the Bank of Japan will raise rates next week, a scenario that continues to support the yen.
Diesel Prices Send a Warning the Broader Oil Market Isn't
Away from currencies, the oil market itself looks calmer than it did a few months ago, but diesel is telling a very different story. The US diesel crack spread, which measures the premium of ultra-low sulphur diesel futures over West Texas Intermediate crude, recently surged above $100 per barrel for the first time on record, touching an intraday high of just over $102.00. That kind of spike points to tight diesel supply relative to crude, a signal that can eventually feed through into higher costs for transport, shipping and industrial users even if headline crude prices stay contained.
