Synopsis:

Credit Agricole sees the recent rally in EUR/USD as inconsistent with traditional trade war dynamics and likely unsustainable. They argue the pair is overbought, overvalued, and vulnerable to ECB pushback, making it a sell-on-rallies candidate in the near term.

Key Points:

• Lagarde Flags EUR Strength as “Counterintuitive”:
  ECB President Christine Lagarde questioned the logic of recent EUR appreciation amid a global trade war, suggesting policymakers see the move as at odds with macro fundamentals.

• FX Theory Suggests EUR Should Weaken:
  Historically, currencies of countries hurt by tariffs (like the Eurozone) tend to weaken to cushion the growth hit, while currencies of tariff-imposing countries strengthen due to higher inflation.

• Strong EUR May Prompt ECB Dovishness:
  The sharp rise in EUR NEER since early 2025 could tighten financial conditions and undermine growth and inflation, possibly forcing the ECB into a more dovish stance.

• Valuation and Positioning:
  Credit Agricole believes EUR/USD is overvalued at current levels, with positioning already stretched and vulnerable to reversal.

Conclusion:

EUR/USD is seen as fundamentally misaligned with trade war dynamics and central bank objectives. Credit Agricole recommends treating it as a sell on rallies, particularly if ECB rhetoric turns more explicit in managing FX-related tightening risks.