Synopsis:

Credit Agricole questions whether the ECB genuinely desires a stronger euro, despite its recent outperformance. While officials have highlighted the EUR’s international role, the bank warns that continued strength could undermine growth and inflation targets.

Key Points:

• EUR Among Top G10 Performers in Q2:
  The euro has been a key beneficiary of USD bearishness, supported by deep Eurozone financial markets and its role as the second-most held reserve currency.

• ECB’s Mixed Messaging:
  Some ECB officials emphasize the benefits of a stronger EUR, such as improved financial conditions and internationalization.
  However, the risks to competitiveness and inflation are being underplayed.

• No Clear Threshold for "Strong" EUR:
  Recent ECB commentary, including President Lagarde’s, suggests current EUR/USD levels are tolerable, with forecasts anchored near 1.10 into 2025–26.

• Fair Value and Policy Limits:
  Credit Agricole’s short- and long-term fair value estimates also hover around 1.10, implying EUR/USD is not overvalued, but warns ECB tolerance is not limitless.

• Forward Focus:
  Sustained EUR gains could pose downside risks to Eurozone growth and inflation. Market attention this week will be on Eurozone data and ECB speeches.

Conclusion:

While the ECB appears comfortable with the current EUR/USD level, Credit Agricole doubts the central bank would remain passive in the face of continued appreciation, especially if it begins to threaten inflation targets or growth recovery.