Synopsis:
Credit Agricole warns that many positives are already priced into EUR/USD, despite strong momentum fueled by German fiscal stimulus expectations, a potential Ukraine ceasefire, and portfolio rebalancing into European assets. While these factors have supported the euro, structural challenges could limit further upside as fiscal expansion carries risks for growth, trade balance, and debt sustainability.
Key Points:
1️⃣ EUR/USD Strength Driven by Fiscal Optimism & Short Covering 🇪🇺
- Markets expect aggressive fiscal spending in Germany & the EU.
- Unwinding of EUR shorts and equity inflows have supported recent gains.
- Trade war risks have not deterred EUR/USD buyers, as investors see tariffs as a bigger threat to the US economy.
2️⃣ Three Reasons EUR Positives May Already Be Priced In 🔍
- Fiscal spending may have an initial negative impact on growth if military imports rise due to limited domestic production capacity.
- Higher infrastructure & defense spending could boost demand, but also increase commodity imports, reducing Eurozone’s excess savings amid weaker exports.
- Surging government borrowing to fund stimulus could weaken Eurozone credit ratings if the fiscal multiplier effect is slow to materialize.
3️⃣ Near-Term Uncertainty Still a Factor for USD 💵
- Market concerns over a US government shutdown have weighed on the dollar.
- However, if shutdown risks fade, USD could regain footing, adding pressure on EUR/USD.
Conclusion:
Credit Agricole remains cautious on further EUR/USD upside, as many bullish factors are already priced in. Fiscal spending may not deliver immediate growth benefits, while higher imports, weaker trade balance, and rising government debt risks could limit sustained EUR strength.
