05:59 AM EDT, 06/13/2025 (MT Newswires) -- The euro generally dislikes geopolitical shocks leading to higher energy prices, and has, as such, detached from Japan's yen and Swiss franc in early price action after the Israeli strike on Iran, said ING.

This is a trigger for an unwinding of stretched longs on EUR/USD, which, according to the bank's model, briefly reached a two-standard-deviation overvaluation relative to short-term drivers on Thursday.

That is just above the 5% "misvaluation," which ING has assessed as the peak, where further rallies would need to be justified either by a substantial shift in rate differentials -- higher EUR short-term rates or lower US dollar short-term rates -- or another material deterioration in the Unite States debt market. That overvaluation sits at 4% after early Friday's correction.

From a European Central Bank perspective, oil market volatility likely endorses its cautious tone on further easing, and potentially pushes the chances of the last 25bps cut of the cycle more to Q4 2025 rather than 3Q -- mirroring the current market preference, stated OING.

Anyway, the bank likely needs to wait for next week's ECB speakers to get a better sense of what this all means for monetary policy. Given the fast-moving geopolitical situation, it's definitely too early to draw conclusions just yet. EUR/USD will likely follow that situation closely and primarily via the oil price channel.

However, the bank thinks the starting point was already quite rich for the pair, and a return to the 1.14-1.15 seems entirely appropriate.

The week has been a rather negative one for sterling's domestic drivers, pointed out ING. April gross domestic product surprised on Thursday with a 0.3% month-on-month contraction, and the bank noted how growth may well get worse later in the year.

Adding to that, payrolls dropped significantly in May, and a relatively uneventful spending review event did very little to suggest the government can dodge tax rises at the fall budget.

In line with ING's call, EUR/GBP has broken above 0.8500, and prolonged geopolitical turmoil in the Middle East should drive further gains in the pair, where the bank retains a bullish bias.

Cable has potentially a wide room for downside correction given how expensive it looks relative to rate differentials, added ING. But the bank has seen how structurally bearish USD bets are preventing US dollar gains from being sustainable. So, ING is more "cautious" on that side.

In the foreign exchange market, a weaker US dollar further supports stronger Central and Eastern European (CEE) currencies, accoridng to ING. On the other hand, on Thursday, the bank saw a slight correction in rates after a sharp rise in previous days -- a move that also pared back recent foreign exchange gains.

However, the picture for CEE currencies still looks more bullish. The Czech Republic's koruna (CZK) in particular should continue its gradual gains, while Poland's zloty (PLN) and Hungary's forint (HUF) seem more of a mix to ING.