Synopsis:

ANZ remains cautious on extrapolating EUR/USD gains too far, despite the recent surge from 1.03 to 1.09 in just 10 days. While German fiscal expansion and softer US data have fueled optimism, ANZ sees ECB policy divergence and geopolitical risks as potential headwinds. The upside is expected to be capped at 1.11, especially if the ECB delivers more rate cuts than currently priced in.

Key Points:

1️⃣ EUR/USD Rally Fueled by German Spending & Weak US Data 🇩🇪📉

• German plans for large-scale defense & infrastructure spending have boosted sentiment.
• A weaker US economic outlook has also supported the euro.

2️⃣ ECB Easing Risks Could Weigh on EUR/USD 📉

• ANZ expects the ECB to cut rates by another 100bps in 2025, while markets price in just 50bps.
• If the ECB turns more dovish than expected, EUR/USD could face renewed downside pressure.

3️⃣ Yield Spread Compression Limits EUR Upside 📊

• The ECB’s recent 25bp cut has narrowed the EU-US 2Y yield spread.
• Softer US data & ECB rate cuts have driven US Treasury yields lower, tightening the yield gap further.

4️⃣ Geopolitical & Trade Risks Add Uncertainty 🌍

• Ukraine-Russia ceasefire talks and potential new US tariffs create event risk.
• The April US trade review could introduce further FX volatility.

5️⃣ Market Positioning Shows EUR Shorts Declining but Still Net Short 🔄

• CFTC data shows EUR/USD short positions have decreased.
• However, the market remains net short, suggesting room for more unwinding but not a structural shift yet.

Conclusion:

ANZ sees EUR/USD upside capped at 1.11, as ECB easing expectations, yield spread tightening, and geopolitical risks limit further gains. While positioning remains net short, the euro’s rally could struggle to extend unless fresh catalysts emerge.