The Euro exchange rates have been enjoying a recent rally, capitalising on the US Dollar sell-off in the aftermath of the US non-farm payrolls and C
The Euro exchange rates have been enjoying a recent rally, capitalising on the US Dollar sell-off in the aftermath of the US non-farm payrolls and CPI data for June.
Despite this rise, strategists at Credit Agricole suggest that this seemingly positive trend may be setting up the Euro for potential overvaluation.
At the time of writing, the Euro to Dollar exchange rate (EUR/USD) is trading at 1.12361, unchanged from Wednesday’s opening levels.
The Euro to Pound exchange rate (EUR/GBP) is quoted at 0.85889, 0.09% lower than the daily opening prices.
Not only do they estimate the Euro as currently overbought and expensive, but also as teetering on the brink of being overpriced relative to fundamental market indicators.
“The FX spot moves have been in excess of the corrections we have seen in the rates and EGB markets of late. As a result, EUR/USD is now looking quite expensive relative to our short-term fair value of 1.0957,” says Valentin Marinov, Head of G10 FX Strategy at Credit Agricole.
Furthermore, the analyst suggests that the recent surge has propelled the currency pair towards its long-term fair value, adding that “This could suggest that further EUR/USD upside would bring it into overvalued territory.”
Marinov’s observations reflect the heightened sense of caution for market participants navigating the Euro’s terrain.
His assessment points to the wider influence of rate differentials and peripheral spreads to Bunds, which are key factors in determining the currency’s fair value.
Notably, Marinov also hints at the risks of the EUR becoming overpriced, which may potentially complicate the currency’s trajectory in the global foreign exchange markets.
Expounding on the Euro’s relative position among G10 currencies, Marinov notes that, “the EUR remains the most overbought currency in G10 FX according to our positioning data.”
In the same vein, the Euro’s Nominal Effective Exchange Rate (NEER) reaching a record peak further underlines the ramifications of the currency’s rally.
Marinov comments, “the EUR NEER that the ECB uses to gauge FX strength has recently hit an all-time high, underscoring the economic impact of the recent EUR rally.”
Moving onto the broader economic landscape, Marinov shifts focus towards key speeches by European Central Bank (ECB) officials, including President Christine Lagarde.
The messages from these discussions will be crucial in shaping investor sentiment around the Euro, especially in the light of recent economic disappointments from the Eurozone.
However, Marinov is sceptical that the remarks from ECB officials would significantly affect the trajectory of the Euro in the near term.
Th FX strategist argues that much of the ECB’s potential policy shifts may already be accounted for in the current price of the currency pair.
“EUR/USD is also trading at a significant premium vs its fair value derived based on EUR-USD rate spread suggesting that many ECB-related positives are already in the price of the currency pair. We therefore doubt that ECB speak would trigger further significant EUR- gains in the very near term,” Marinov adds.
Marinov’s analysis highlights the potential for overvaluation and serves as a cautionary tale for investors looking to make the most out of the current Euro surge.
While there may be further short-term opportunities, these may be offset by the risks of a pricier Euro in the long run.
The Euro to Dollar exchange rate’s rally could be reaching a tipping point, and the coming weeks will undoubtedly provide crucial insights into the currency’s future direction.
www.exchangerates.org.uk