Euro is Undervalued and ECB Succession Issues — ING Perspectives

Francesco Pesole of ING believes that the recent decline in EUR/USD has been too sharp relative to short-term interest rate differentials. According to his model, the currency pair is currently undervalued by about 2.1% to 2.3%. He attributes this to narrower front-end interest rate spreads despite heightened risk aversion in the stock market. Pesole expects EUR/USD to rebound above 1.120, and notes that discussions over the succession at the European Central Bank should have only a limited and short-lived impact on the euro.