06:06 AM EST, 01/10/2025 (MT Newswires) -- EUR/USD undervaluation has again exceeded 2.5% as foreign exchange and short-term rate dynamics continue to diverge, said ING.

When the EUR:USD two-year swap rate gap was last at the current -175bps (November), EUR/USD was trading around 1.05, wrote the bank in a note.

This tells ING that markets are pricing a good deal of negatives into the euro at this stage, and perhaps the euro may be penalized less than other G10 currencies should United States payrolls come in strong on Friday.

EUR/USD can find decent support at 1.0250 or at the Jan. 2 low of 1.022, stated ING.

One positive development for the euro has been the correction in TTF natural gas prices, now at EUR45/Mwh after having touched 50 euros at the start of January, pointed out the bank. Markets have seemingly been reassured by forecasts of milder weather in Europe and robust liquefied natural gas supply from the U.S.

There is also some ongoing discussion within the European Union -- championed by Slovakia -- to potentially reactivate the Ukraine gas pipeline.

The 10-year Gilt stabilized around 4.80% on Thursday, which has allowed sterling to partially recover after hitting a 1.224 low early Thursday, added ING. What has helped calm market nerves was a comment by a top United Kingsom Treasury official who claimed: "meeting the fiscal rules is non-negotiable."

In practice, this means that since the rise in yields has eroded the fiscal headroom, Finance Minister Rachel Reeves is more likely to deliver some fiscal consolidation should the updated OBR forecasts -- released March 26 -- show the government isn't on track to meet the fiscal rule. That consolidation means higher taxes or lower spending - with the latter generally deemed more likely at this stage.

The market seems to be acknowledging the U.K. Treasury's reiterated fiscal pledges and this has prevented the Gilt and sterling selloffs from becoming disorderly. This isn't a sovereign crisis, and the rise in yields is -- so far -- justified, noted the bank.

This suggests some short-term respite for sterling. In the coming months, ING expects fresh pressure on GBP on the back of much larger easing by the Bank of England compared with pricing; which may coincide with the fiscal tightening mentioned above.

Friday, the U.S. leg could add some extra pressure on GBP/USD, but if Gilts have another quiet session, the pair should attract buyers in the 1.225-1.230 area.

ING saw a strong divergence in Poland's zloty (PLN) and the Czech koruna (CZK) on Thursday and both currencies seem too strong. Friday the U.S. market will lead the market.

For the zloty, next week's central bank meeting may provide further downside support for EUR/PLN. Also, as the pair remains within the bank's preferred range of 4.260-4.280, ING doesn't see strong reasons to take a contrary position.

In the case of EUR/CZK, ING sees more of an upside bias and any levels closer to 25.00 may be interesting for the market to go short CZK ahead of inflation numbers and some Czech central bank headlines next week given the hawkish market pricing.