ING Warns Forex Traders: Why Is the Dollar Overbought Yet No Decline in Sight?

Dollar: Despite the dollar index sitting in overbought territory (a 1.1% overvaluation against the G10 basket), ING analysts believe that without a new economic catalyst, a near-term drop or sharp sell-off in the dollar should not be expected. Euro: Heightened risk premium from France's financial crisis and saturation of interest rate pricing capacity [

US dollar: Despite the dollar index being in the overbought range (1.1% overvaluation compared to the G10 basket), ING analysts believe that without the emergence of a new economic stimulus, one should not expect an imminent drop or a rapid fall of the dollar.

Euro: Intensification of the risk premium due to the French financial crisis and the filling of the ECB's interest rate pricing capacity led ING to reduce its forecast for EURUSD to 1.13 at the end of 2026 (with a possible short-term drop to 1.11).

British Pound: Expectations of a contraction by the Bank of England and a delay in interest rate cuts until 2027 will keep the pound strong against the euro, and EURGBP will continue to fluctuate in the 0.84-0.85 range.

After several weeks of growth, the US dollar is facing signs of overvaluation and overbought. Although all the statistics and traders' behavior show that the dollar has risen as far as it can and has fallen, ING experts say that this is not the whole story; We should not expect a retreat or rapid decline of the dollar anytime soon.

Meanwhile, French fiscal concerns continue to weigh on the euro, with the institute cutting its EURUSD forecast to 1.13 for the end of the year. In the United Kingdom, an increase in the probability of interest rate growth can prevent the euro from quickly improving against the pound.

This report of Ambassador Arjan was prepared based on the analysis published on the ING website and translated and rewritten for the Persian speaking audience.

The dollar has reached the overbought range; Why hasn't the signal returned yet?

The dollar has started the week with continued growth. The increase in oil prices after the escalation of military activities in the Persian Gulf region, along with the weakness of global bond markets, has helped maintain demand for the dollar.

At the same time, several indicators show that the upward trend of the dollar has been extended more than in the past. ING's short-term valuation model suggests the dollar trades above fair value against all G10 currencies, except the British pound.

According to this model, the dollar is overvalued by about 1.1% against the G10 currency basket. The Euro, Swedish Krona and New Zealand Dollar are also around 1.5-2.5% below fair value.

Although a look at the valuation of the dollar and the situation of buyers shows that the bullish trend has been too long, but ING analysts believe that this excess does not mean that the dollar is going to go down anytime soon.

The buying position of the dollar has gone up; But what can reverse the trend?

The trading situation also shows that a large number of investors are in the position of buying dollars.

The dollar's net long position against G10 currencies, excluding the Japanese yen, had reached 24 percent of open contracts as of last Tuesday, according to data cited by ING. In the options market, DXY quarterly risk reversal indicators have approached the peaks of March 2025 and March 2026.

This situation can make the dollar more vulnerable to negative news; But it usually takes a marked change in economic or market conditions to initiate a sustained downtrend.

ING points to past experiences to explain this: In March 2025, the shock caused by a wave of "US asset sales" caused the dollar to change. In March 2026, the expectation that the Federal Reserve's interest rate would remain unchanged prevented the dollar from benefiting from geopolitical tensions.

From the point of view of this institution, in the current situation, there is still no similar stimulus to change the trend.

✔️ Read more: Outlook for the week ahead; US inflation, French budget crisis and third quarter financial reports determine the direction of the markets

Why are interest rate expectations still in favor of the dollar?

One of the main factors supporting the dollar is the more resilient expectations for the Federal Reserve's monetary policy compared to many other central banks.

Even if the price of oil declines, expectations for the continuation of the contractionary policy of the Federal Reserve can prevent a significant drop in the dollar. At the same time, the weakness of global bond markets has increased the demand for liquid and defensive currencies; The position that the dollar still enjoys.

The market also expects US core inflation to have increased by around 0.2% month-on-month in September. If the data comes out as expected, the likelihood of a strong negative dollar reaction will be limited.

However, higher or lower than forecast inflation can change expectations about the path of interest rates; For this reason, inflation data remains one of the most important potential drivers of the dollar.

American mid-term elections; The hidden risk of the dollar?

ING sees the US mid-term elections as a factor that the market may not have paid enough attention to yet.

The possibility of Republicans losing control of Congress has long been reflected in market prices. However, if the approach to the election causes investors to adjust their positions to reduce risk, there is a possibility of pressure on the dollar.

ING doesn't expect this cautious positioning to necessarily begin immediately, and expects such a shift to become apparent by late October, closer to election time.

Therefore, the election is one of the upcoming risks, but it cannot be considered as a definite trigger for changing the dollar trend.

ING cut EURUSD target to 1.13

In the Euro market, France's financial concerns are still an important factor in the pricing of this currency.

ING estimates that EURUSD is trading around 1.5% below fair value compared to short-term fundamentals. This situation could be a sign that the risk premium associated with France has become a more stable factor in the valuation of the euro.

However, if French government bonds continue to fall in price, this risk premium could widen and put more pressure on the euro.

For now, ING does not expect the difference between French and German 10-year bond yields to widen significantly again. This institution believes that if this year's budget is approved through executive order, the yield difference may remain below the range of 150 to 160 basis points.

However, conditions remain difficult for euro buyers. The market has fully priced in a December ECB interest rate hike, leaving limited room for further support for the euro from the path of interest rate expectations.

ING has lowered its target for EURUSD to 1.13 in Q4 2026 and Q1 2027. In the short term, the range of 1.110 is still one of the downside risks of this currency pair.

▶️ See: fundamental analysis of the forex market; From artificial intelligence concerns to the US inflation test

Will the pound stay stronger against the euro?

ING has lowered its EURGBP forecast and expects the pair to trade in the 0.84-0.85 range for at least the next few months.

On the one hand, risks related to France continue to put pressure on the euro. On the other hand, the British central bank has sufficiently shown that it is ready to increase the interest rate.

However, ING still believes the market has overly contractionary expectations for UK interest rates in 2027. The market has priced in about 100 basis points of interest rate hikes until July of next year, but from the point of view of this institution, the possibility of one or two steps of interest rate hikes has increased.