Synopsis:

Credit Agricole acknowledges the bearish sentiment surrounding EUR/USD due to Eurozone underperformance, political risks, and US-EU trade tensions. However, they maintain a neutral EUR/USD outlook in the next three to six months, expecting a recovery toward 1.10 in the longer term.

Key Points:

1. Bearish EUR/USD Drivers in the Near Term:

   • Cyclical Divergence → The Eurozone economy remains sluggish, while the US economy continues to outperform.
   • Political & Geopolitical Risks → Uncertainty in the Eurozone, along with potential US-EU trade tensions, weighs on sentiment.
   • Policy Divergence → The ECB is dovish and expected to cut rates further, while the Fed remains more neutral, keeping USD supported.

2. Neutral EUR/USD Outlook for the Medium Term:

   • Credit Agricole does not expect a sustained decline in EUR/USD, despite near-term pressures.
   • They see limited downside beyond current levels, as some of these risks are already priced in.

3. Long-Term Recovery Toward 1.10:

   • Over the next six to twelve months, they anticipate EUR/USD to gradually recover toward its long-term fair value of 1.10.
   • This assumes US economic momentum slows, the Fed eventually eases, and Eurozone sentiment stabilizes.

Conclusion:

Credit Agricole describes the current EUR/USD weakness as “Dark Before the Dawn”, believing the currency pair will recover in the longer term despite near-term headwinds. They expect EUR/USD to remain neutral in the next 3-6 months before moving back toward 1.10 in 6-12 months.