The euro is forecast to come under renewed pressure against the US dollar this month as rising energy prices reinforce expectations that the Federal Reserve may need to keep monetary policy tighter for longer, according to ING.

ING believes the deteriorating situation in the Gulf is proving more supportive for the US dollar than the euro, with higher oil and natural gas prices creating a particularly difficult backdrop for energy-importing Europe while simultaneously keeping US inflation concerns alive.

Why Higher Energy Prices Favour the US Dollar

According to ING, two themes are dominating currency markets: rising energy prices and strong demand for higher-yielding currencies.

The bank argues that renewed disruption risks in the Gulf are strengthening the US dollar because higher energy costs could keep Federal Reserve tightening expectations alive.

At the same time, Europe remains more vulnerable to higher energy prices, with natural gas costs beginning to climb again at a time when inventories remain relatively low.

That combination leaves the euro at a disadvantage against the dollar in the near term.

Why the Euro Is Losing Momentum

ING says last week’s corrective rebound in EUR/USD has already started to lose momentum.

The bank notes that higher gas prices have capped the euro’s recovery, while a relatively quiet Eurozone economic calendar means energy markets are likely to have a greater influence on short-term price action than comments from European Central Bank officials.

EUR/USD was trading close to 1.1414 on Monday afternoon after remaining largely unchanged over the past week, having already fallen more than 2% during June.

The Federal Reserve Holds the Key

ING believes upcoming US inflation data and testimony from Federal Reserve Chair Kevin Warsh will be the biggest catalysts for EUR/USD this week.

Although headline inflation may soften, the bank expects rising energy prices and resilient core inflation to keep the prospect of another Fed rate increase firmly on the table.

If markets continue to believe US interest rates could remain higher for longer, the dollar is likely to stay well supported against lower-yielding currencies such as the euro.

What’s the Forecast for the Euro versus the US Dollar?

ING expects EUR/USD to drift lower in the near term outlook.

The bank believes the exchange rate can easily fall towards 1.1360 and says a test of the 1.1300-1.1325 area is possible later this month if energy prices continue rising and markets maintain expectations for tighter US monetary policy.

Even so, ING does not expect that area to give way easily, suggesting it is likely to provide an important floor for EUR/USD during the summer unless the macroeconomic backdrop deteriorates further.

EUR/USD Forecast FAQ

Why does ING expect EUR/USD to weaken?

ING believes higher oil and natural gas prices favour the US dollar by keeping expectations for Federal Reserve tightening alive while simultaneously weighing on the euro through higher European energy costs.

What is ING’s near-term EUR/USD target?

ING believes EUR/USD can fall towards 1.1360 initially, with scope to test the 1.1300-1.1325 area later this month.

Why are natural gas prices important for the euro?

Europe remains heavily exposed to imported energy. Rising gas prices increase inflation risks and can weaken the region’s growth outlook, making the euro less attractive.

What could stop EUR/USD falling?

A decline in energy prices or signs that the Federal Reserve no longer needs to consider another interest rate increase would reduce support for the US dollar and could help stabilise EUR/USD.