Synopsis:

HSBC warns that EUR/USD appears rich relative to rate differentials, with its recent rally driven more by speculative flows and positioning shifts than by traditional macro drivers such as interest rates or risk sentiment. While 2Y EU-US rate spreads have moved modestly in the Euro’s favor, EUR/USD has overshot, even as those spreads have begun to narrow again. The rally now depends heavily on the swift and effective delivery of European fiscal stimulus, making it vulnerable if expectations disappoint.

Key Points:

1️⃣ EUR/USD Rally Driven by Flows, Not Fundamentals 💶💸

• HSBC’s speculative flow tracker is currently the most relevant EUR/USD driver.

• Interest rate differentials and risk appetite have taken a backseat.

2️⃣ Valuation Looks Stretched Relative to Rate Differentials 📉

• While 2Y spreads briefly moved in EUR’s favor, the FX pair has outpaced that move.

• Recent narrowing in spreads hasn’t been reflected in EUR/USD weakness—suggesting overvaluation.

3️⃣ Rally Relies on Fast Fiscal Execution ⚠️

• Swift and sizable EU fiscal stimulus is now key to justifying elevated EUR/USD levels.

• Any delays or dilution of fiscal plans could lead to sharp unwinds in speculative positions.

Conclusion:

HSBC sees EUR/USD as overextended, with its recent gains driven more by speculative positioning than solid macro support. Unless European fiscal stimulus materializes quickly and convincingly, the Euro risks a pullback, especially as rate differentials no longer justify further upside.