📝Global Equity Beta Currently Driving EUR/USD: ING FX Strategy

Our financial fair value model takes into account an array of market factors to estimate mis-valuation in FX in the short-term. A closer look at the swings in the coefficients of the EUR/USD model helps us understand why the pair has been capped despite falling US rates. Back in late 2021, the last time when the two-year swap spread was as narrow as 80-90bp, EUR/USD was trading around 1.15. However, short-term rate differentials back then were the single most important driver of EUR/USD (chart below), while the coefficient of two-year swap spreads is now very close to zero, meaning that even a very large move in the spread statistically implies only a small move in EUR/USD. And this is exactly what we are observing now.

At the moment, equity factors – both global (i.e. risk sentiment) and relative (i.e. performance of European equities versus US equities) – are steadily on the driver’s seat when it comes to EUR/USD. Risk sentiment, in particular, determines the majority of the pair’s moves: that’s probably because we’re at the end of a unique business cycle and investors are more fearful about stagflation and central bank over-tightening than they are about relative yield differentials. - ING FX Strategy