Synopsis:

Credit Agricole revises its EUR/USD outlook, maintaining a negative stance but moderating its bearish forecasts for the next three to six months. The adjustments reflect changing expectations for Fed policy, US political dynamics, and European political stability.

Key Points:

1. Fed Easing Risk: Credit Agricole now anticipates a more front-loaded easing cycle from the Fed, which could diminish the USD's real rate appeal. Despite this, they doubt the Fed will meet current aggressive market rate cut expectations. They still foresee a USD recovery from current levels, albeit less pronounced than previously forecast.
2. US Presidential Election: The possibility of a closer race in the upcoming US presidential election is acknowledged, with potential implications for USD strength. A Trump victory could boost the USD in Q4 2024, although the chance of a Republican sweep has diminished, reducing the likelihood of a significant USD rally.
3. European Political Risks: Eased fears about political turmoil in France have lessened the impact of sovereign debt risks on the EUR. While downside risks to the EUR remain, they are expected to be less severe than before.

Conclusion:

Credit Agricole’s updated EUR/USD forecast suggests a modest improvement, with the pair expected to trade around 1.08 in Q4 2024 and Q1 2025, compared to earlier projections of 1.05 and 1.07. This revision reflects a more balanced view of Fed policy, US election uncertainties, and reduced political risks in Europe.