Synopsis:

Credit Agricole argues that the recent sharp decline in EUR/USD is excessive, driven by cyclical and policy divergence expectations. They highlight that fundamentals and valuation metrics suggest the pair is undervalued, leaving room for a near-term rebound.

Key Points:

• Divergence Concerns: EUR/USD has been hit hard by market expectations of growing divergence between Eurozone and US economic cycles and monetary policies. This has been fueled by Donald Trump’s election victory and the potential for US tariffs on the EU.

• Policy Divergence Overestimated: Credit Agricole’s economists believe the divergence in policy paths between the ECB and Fed is less pronounced than what is currently priced into markets.

• Fundamental Undervaluation: A broader analysis of factors such as sovereign credit risks and relative equity performance supports the view that EUR/USD is undervalued at current levels.

• Excessive Sell-Off: The recent decline in EUR/USD is seen as overdone, especially when compared to movements in the real EUR-USD rate spread.

Conclusion:

Credit Agricole sees the EUR/USD sell-off as excessive and expects a correction in the near term. While divergence concerns weigh on sentiment, fundamental and valuation indicators suggest that the pair is undervalued and may rebound from current levels