Synopsis:

Credit Agricole highlights that EUR/USD is in oversold territory following the recent selloff, setting the stage for a continued short squeeze. With the "Trump Trade" now largely priced in and month-end flows favoring USD selling, the pair could find further support in the near term.

Key Points:

• Positioning and Sentiment:

  • EUR/USD has entered oversold territory, as indicated by FX positioning data.
  • A short squeeze is underway, helped by month-end rebalancing flows that could favor USD selling.

• Fundamental Context:

  • The "Trump Trade" is nearly fully priced into EUR/USD, reducing additional downside risks.
  • Significant uncertainty remains around the timing and scale of US trade tariffs targeting the EU or China, limiting the immediate impact on EUR.
  • Many ECB-related negatives and Fed-related positives are already reflected in the EUR/USD exchange rate.

• Supportive Developments for EUR:

  • Progress on the French National Assembly’s 2025 budget could ease some EUR headwinds.
  • A reassessment of overly dovish expectations for the ECB by rate investors could provide additional EUR support.

Conclusion:

Credit Agricole expects the EUR/USD short squeeze to persist in the absence of significant negative data surprises. Month-end rebalancing flows, coupled with more balanced fundamental expectations, could help the pair consolidate further, offering near-term upside potential.