ING’s Chris Turner argues that EUR/USD remains under pressure as investors position for further Middle East escalation and tighter global financial conditions. He notes that Sovereign Wealth Fund retrenchment and hawkish European Central Bank pricing weigh on the pair. Turner sees scope for EUR/USD to test and potentially break recent lows if risk sentiment deteriorates further.

Pro‑cyclical pair faces downside risks

"EUR/USD remains soft as investors seem more minded to brace for escalation than a ceasefire. News of further US troop movements towards the Middle East is seen as worrying. Those investors in February who backed the view that the US military build-up would result in action – and not merely be used for maximum bargaining pressure – were proved correct."

"Developments in the Middle East are a clear risk negative. One aspect that needs more attention is the role of Middle East investors, largely through Sovereign Wealth Funds, in global capital markets. Their funds have typically been deployed through bond markets rather than bank deposits, but the region's loss of access to energy revenues and now new fiscal commitments at home will be triggering a tightening of global financial conditions."

"That is bad news for pro-cyclical currency pairs like EUR/USD."

"It seems the vast majority of the market does not want to buy into early central bank tightening. But until we see a sharp reversal lower in equity prices, events in the Middle East and hawkish central bank speak can probably see the hawkish pricing retained in money market curves."

"EUR/USD looks vulnerable, and we could easily see a break down to 1.1485 and a retest of the lows in the 1.1410/30 area."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)