Synopsis:

Credit Agricole adopts a bearish stance on EUR/USD, arguing that the pair is overextended and at odds with fundamental drivers. They cite a potential USD rebound, policy stabilization in the US, and adverse macro effects of the euro’s strength on the Eurozone economy as reasons for a downward reassessment.

Key Points:

• USD Weakness May Be Overdone:

  • The USD sell-off has lost momentum, and the currency appears undervalued relative to rate-based fair value models.

  • Trump’s de-escalation of trade tensions and retreat from attacking Fed independence reduce political uncertainty.

  • A potential rebound in US capital inflows could support both USD and USTs.

• EUR Rally Risks Becoming Self-Defeating:

  • Euro appreciation since early 2025 has weakened the Eurozone’s growth and inflation outlook.

  • A recent EU study estimates that sustained euro strength could subtract around 0.25% from Eurozone GDP.

  • This strengthens the case for more ECB rate cuts, potentially undermining EUR further.

• Disconnect Between EUR/USD and Rate Spreads:

  • EUR/USD’s rally has diverged from the EUR-USD rate differential, which historically anchors the pair.

  • Credit Agricole sees this divergence as unsustainable.

Conclusion:

Credit Agricole believes EUR/USD has overshot fundamentals. They expect limited further gains in the pair and maintain a bearish outlook based on rate differentials, undervalued USD metrics, and the euro’s drag on Eurozone macro conditions.