The Euro has been on a slippery slope, particularly in August, as the U.S. Dollar (USD) gains strength. Adding to the woes of the Eurozone's currency is a flurry of negative economic news, most notably concerning Germany, the bloc's largest economy. Yet Credit Agricole suggests that perhaps much of the bad news is already baked into the EUR/USD rate, leaving room for potential upward movement.
Deteriorating Eurozone Outlook:
Germany's Economic Health: Credit Agricole notes the rapid deterioration in Germany's economic outlook as one of the leading drivers of negative sentiment towards the Euro.
Rate Hike Expectations: Investors have scaled back their expectations for further interest rate hikes from the European Central Bank (ECB). This shift has eroded the Euro's relative rate advantage, adding to the headwinds facing the currency.
Hawkish Skip in September?
Despite the grim state of affairs, Credit Agricole posits that the ECB may opt for a "hawkish skip" come September. While rates might remain on hold, the bank could commit to further policy tightening down the line, which could offer the beleaguered Euro some respite.
Fair Value Analysis:
According to Credit Agricole's short-term fair value analysis, the EUR/USD rate is currently trading at a discount. This valuation is relative to levels that align with the EUR-USD rate spread and other key foreign exchange drivers, suggesting that the currency pair may have room to rise.
Although the Euro has faced a series of setbacks in recent times, Credit Agricole argues that much of the negativity could already be factored into its current valuation. With a potential for a 'hawkish skip' by the ECB in September and their fair value analysis indicating that the Euro is trading at a discount, the bank sees the currency as due for a potential rebound.