Credit Agricole questions whether the ECB genuinely desires a stronger euro, despite its recent outperformance. While officials have highlighted the EUR’s international role, the bank warns that continued strength could undermine growth and inflation targets.
Key Points:
EUR Among Top G10 Performers in Q2:The euro has been a key beneficiary of USD bearishness, supported by deep Eurozone financial markets and its role as the second-most held reserve currency.
ECB’s Mixed Messaging:Some ECB officials emphasize the benefits of a stronger EUR, such as improved financial conditions and internationalization.However, the risks to competitiveness and inflation are being underplayed.
No Clear Threshold for "Strong" EUR:Recent ECB commentary, including President Lagarde’s, suggests current EUR/USD levels are tolerable, with forecasts anchored near 1.10 into 2025–26.
Fair Value and Policy Limits:Credit Agricole’s short- and long-term fair value estimates also hover around 1.10, implying EUR/USD is not overvalued, but warns ECB tolerance is not limitless.
Forward Focus:Sustained EUR gains could pose downside risks to Eurozone growth and inflation. Market attention this week will be on Eurozone data and ECB speeches.
Conclusion:
While the ECB appears comfortable with the current EUR/USD level, Credit Agricole doubts the central bank would remain passive in the face of continued appreciation, especially if it begins to threaten inflation targets or growth recovery.
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