Synopsis:

CIBC expects the recent surge in EUR/USD to lose steam before reaching the 1.16 level in Q2, despite strong two-month gains. While improved sentiment toward the eurozone and weakening faith in U.S. exceptionalism have driven the rally, increasing signs of an overbought market and growing concerns at the ECB about tighter monetary conditions may cap further upside.

Key Points:

• Biggest 2-Month Gain Since 2010:

  • EUR/USD is set for its strongest two-month performance since late 2010, driven by weakening U.S. asset appeal and optimism about eurozone fiscal expansion.

• Shift in Capital Flows:

  • Germany’s fiscal push and EU defense spending are encouraging capital repatriation, potentially crowding into the eurozone’s current account surplus.

• Positioning & Valuation:

  • EUR is still “cheap” from a long-term valuation perspective (CIBC: fair value at 1.41; OECD: 1.46), but speculative positioning has surged, suggesting the rally may be stretched short term.

• ECB Dovishness Remains a Brake:

  • April’s 7th rate cut brings the deposit rate near the top of the neutral corridor (1.75–2.25%).

  • Lagarde flagged U.S. tariffs as disinflationary for Europe, suggesting the ECB may cut further to prevent a tightening in financial conditions.

• Technical Resistance & Market Pricing:

  • Long-term Fibonacci resistance at 1.16 (38.2% retracement from the 2011 high to 2022 low) is seen as a likely stall point.

  • ECB rate cut expectations continue, with 14.5bps priced for June-July and chatter of back-to-back easing.

Conclusion:

CIBC remains constructive on the euro longer term, but expects the EUR/USD rally to stall below 1.16 in the near term. Market positioning, dovish ECB risk, and technical resistance all argue for limited further upside despite improved sentiment.