Synopsis:

Credit Agricole assesses the tug-of-war between opposing forces influencing EUR/USD amid escalating trade tensions. While US stagflation fears support EUR upside, Eurozone fragility and ECB policy risks remain a downside threat.

Key Points:

• Bullish Case for EUR/USD:

  • US protectionism could lead to stagflation fears.

  • Potential for persistent outflows from US equity and bond markets.

  • Repatriation flows could benefit Eurozone assets.

• Bearish Case for EUR/USD:

  • A trade war could tip the Eurozone—already fragile—into recession.

  • The ECB may be forced into aggressive rate cuts.

  • The Euro remains vulnerable to negative growth and policy divergence.

• Current Positioning:

  • Many USD negatives and some EUR positives already priced in.

  • Volatile EUR/USD reactions reflect heightened market uncertainty.

Conclusion:

Credit Agricole remains neutral to moderately bearish on EUR/USD for Q2. While the pair may find temporary support from US economic concerns, the structural vulnerability of the Eurozone to trade shocks and potential ECB dovishness suggests caution is warranted.