Synopsis:

Credit Agricole argues that while EUR/USD looks clearly overvalued on standard fair value models, the pair remains a buy on dips ahead of a push toward 1.20, supported by robust Eurozone capital markets, lingering USD exposure, and improving EU growth sentiment.

Key Points:

• Structural EUR Support:
  • The EUR is seen as the most credible USD alternative, thanks to its deep liquidity and significant unhedged USD asset exposure by Eurozone investors.

• Macro Backdrop Favors EUR:
  • Prospects for a US-EU trade deal, resilient Eurozone data, and an end to ECB easing contrast with US economic fragility and more aggressive Fed cut expectations.

• Overvaluation Signals Mixed:
  • Credit Agricole’s fair value models show EUR/USD is very overvalued at current levels.
  • However, PPP and FEER-based gauges point to fair values near or above 1.20, aligning with investor sentiment.

• ECB Not Concerned:
  • Recent ECB comments suggest policymakers do not view the stronger EUR as problematic, reducing intervention risks.

• Client Positioning:
  • Recent meetings indicate that EUR bulls are generally targeting 1.20, reinforcing dip-buying flows.

Conclusion:

Despite valuation models flashing red, Credit Agricole believes the macro narrative, policy backdrop, and market positioning should keep EUR/USD supported. Any near-term dips remain opportunities to re-load longs, with 1.20 as a medium-term magnet.