Euro: Energy risks cap upside against US Dollar – ING

Chris Turner at ING says EUR/USD rallied on softer US CPI but warns that rising Oil and European natural gas prices limit upside. He expects EUR/USD to struggle above 1.1460/70 and potentially retreat toward 1.1360/80 if Oil gains another leg higher. Strong demand below 1.14 and possible rotation into European equities are noted, though flows into US-listed eurozone ETFs remain muted.

Energy sector weighs on Euro

"Along with most dollar pairs, EUR/USD very much enjoyed yesterday's soft US CPI release. Were it not for developments in the Gulf and in energy markets in general, we would be happy to call EUR/USD steadily higher from here. But European natural gas is now back to levels seen in mid-March and, as above, it is too early to trade an 'all-clear' US inflation story."

"In the absence of a major improvement in energy markets, we suspect that EUR/USD will struggle to break above the 1.1460/70 area and again could move down to the 1.1360/80 area should oil prices deliver another leg higher."

"We do note, however, that there seems to be strong demand for EUR/USD sub 1.14. One suggestion could be a rotation into European equities as analysts raise expectations for European earnings. That may be the case, but so far those flows have not shown up in US-listed eurozone equity ETFs, e.g., the iShares MSCI Eurozone ETF."

"Elsewhere, a pro-risk environment given lower prospects of Fed tightening, higher energy prices and potentially lower volatility favouring the carry trade all point to the Norwegian krone recovering some of its losses since May. We have a one-month target at 11.05 for EUR/NOK, but the move could easily extend to 10.95."