FXStreet (Delhi) – Research Team at ING, notes that the EUR/USD is the most vulnerable G10 currency to the Fed tightening cycle.
Key Quotes
“This is not necessarily because higher US rates in isolation would have a more detrimental effect on the cross. If anything, the negative impact of higher US rates on EUR is similar to most other G10 currencies. Rather, its vulnerability stems from the ultra-dovish ECB that managed to decouple local EZ rates from those in the US. The market’s view that the ECB and Fed monetary policy cycles are fully unsynchronised and the lack of spill-over effect from the US rates into EZ rates mean that EUR/USD offers a pure play on higher US rates, making it one of the most vulnerable crosses.”
“The above is not to say that EUR is not sensitive to domestic swap rates and yields. It very much is and EUR has, in fact, the highest beta to the domestic (EZ) rates among all USD/G10 crosses, but as long as the ECB ensures that EZ rates either remain low or fall even further, the upside risks to EUR/USD are thus very low. Hence we look for EUR/USD to break below parity (EUR/USD at 0.98) in 1H16 caused by the market concerns about the Fed being behind the curve and expectations of a more hawkish Fed tightening cycle (whether such a market reaction will be justified or not is a different matter).”
(Market News Provided by FXstreet)