EUR/USD kicks off the new week positively. Economists at ING analyze the pair’s outlook.

A correction could take EUR/USD back to the 1.0850/1.0900 area

We must reiterate that EUR/USD is trading around the top of the range, consistent with a still depressed short-term rate differential. The EUR:USD 2-year swap rate gap has not moved much since the start of March, staying around 125 bps, and we need to see a clearer convergence of USD and EUR rates to justify continued support beyond 1.1000.

We see some downside risks this week for EUR/USD, and a correction could take it back to the 1.0850/1.0900 area. However, our call for a first rate cut in June by both the ECB and the Fed can still argue for a higher EUR/USD, as the Fed should ultimately deliver a larger easing package.