Credit Agricole discusses the near-term potential for EUR appreciation, driven primarily by month-end FX flows and market expectations of a dovish pivot by the Federal Reserve. However, they also note certain challenges that may dampen the fundamental appeal of the single currency.
- Recent EUR/USD Performance: The EUR/USD pair recently reached a five-month high, boosted by supportive month-end FX flows and expectations of a dovish shift in Federal Reserve policy.
- Relative Underperformance of EUR: Despite this recent high, the EUR has underperformed most other G10 currencies, except for the CAD. This suggests that FX investors may have reservations about the fundamental attractiveness of the EUR.
- ECB's Challenges Similar to the Fed: Like the Federal Reserve, the European Central Bank (ECB) is facing difficulties in convincing rate investors that it will not cut rates in the foreseeable future.
- Market Rate Cut Expectations Impacting EUR: Persistent market expectations for rate cuts are eroding the appeal of the EUR's interest rates.
- Supportive Month-End FX Flows: Despite these challenges, Credit Agricole anticipates that supportive month-end FX flows could continue to bolster the EUR/USD in the very near term.
Credit Agricole's outlook for the EUR in the near term is cautiously optimistic, primarily due to supportive month-end FX flows and dovish Fed pivot expectations. However, challenges like the ECB's struggle to align rate investor expectations and the general underperformance of the EUR in the G10 currency space might limit its fundamental appeal. Overall, while there is potential for further upside in the EUR/USD, underlying market dynamics and central bank policies could impact its trajectory.