BNP Paribas (BNPP) anticipates that the EUR/USD will close the year around its current level of 1.07, indicating a stabilization after recent fluctuations. Despite some factors that may support the EUR, BNPP identifies three key aspects that could limit its near-term appreciation.
Economic Performance Differential: The relative health of the US economy, compared to the stagnation in the Eurozone, is likely to attract capital flows towards US assets, potentially strengthening the USD against the EUR.
Carry Strategy Environment: With the European Central Bank (ECB) likely having reached its terminal rate, the EUR's yield appeal is diminished. In the current environment, where carry strategies are favorable, this lack of yield may weigh on the EUR.
Energy Price Risks: The potential for escalating geopolitical tensions could lead to higher energy prices. As the Eurozone is a net energy importer, such shocks could negatively impact its terms of trade and pose a downside risk to the EUR.
BNPP's analysis suggests that while the EUR/USD has found some stability, there are significant factors capping its potential for near-term gains. The differential in economic performance between the US and the Eurozone, a favorable environment for carry strategies, and risks associated with energy prices are all seen as constraints on the EUR. Consequently, BNPP forecasts that EUR/USD will likely close the year around its current levels, indicating a limited scope for significant movement in either direction.