Euro-Dollar Has Scope to Extend Near-term Rise, says Crédit Agricole
- Written by: Gary Howes
-
Image © Pound Sterling Live
Europe isn't in for another energy shock, and the single currency can rise as it closes a valuation gap.
This is according to Crédit Agricole, the France-headquartered lender and investment bank.
The Euro came under pressure at the start of 2025, falling to its lowest level in two years against the Dollar, with some analysts pointing to a spike in European gas prices as a potential driver.
Ongoing U.S. Dollar strength remains the key driver of Euro-Dollar weakness, but scars from the gas price surge that followed Russia's invasion of Ukraine remain etched in the market's memory. With the Eurozone's economy struggling, the last thing it needs is another spike in gas prices.
"The theme of energy price rises is again in focus and there has been another sharp rise in natural gas prices following the end of gas supplies running through Ukraine with Ukraine refusing to renew a transit contract with Russia that helps lift Russia’s revenues from energy sales," says analyst Derek Halpenny at MUFG Bank Ltd.
EUR/USD investment bank consensus forecast for 2025. See the median, mean, highest and lowest targets, giving a highly accurate forecasting resource. Request your copy now.
Valentin Marinov, an analyst at Crédit Agricole, says for many FX investors, the start of 2025 brought back memories from 2022 when an escalating energy crisis in the Eurozone pushed the Euro to Dollar exchange rate to a 20-year low.
By the start of the year the EU's gas reserves stood at 72% of capacity, the lowest in the post-Ukraine invasion era. On January 01 it was confirmed Ukraine would cease the transfer of Russian gas to Eastern Europe after letting an existing transfer deal expire on January 1.
"The end of Russian gas supplies to Europe through Ukraine, coupled with rapidly falling Eurozone gas storage levels, have propelled European gas prices to their highest level in more than a year recently," says Marinov.
"That being said, we believe that comparisons with the dark days of 2022 are premature," he adds.
Crédit Agricole thinks there is less scope for significant disruption in the global energy markets and further thinks that growing energy prices in Europe should not rekindle sovereign credit risks like they did three years ago.
The expansion of the Liquefied Natural Gas market since Russia's invasion is one of the biggest developments in the global energy market. Europe now depends more on this ship-borne supply than it does on pipelines.
Above: Fair value is estimated to be higher than current levels.
"We also believe that the latest rebound of energy prices could slow down the progress of Eurozone inflation towards the ECB’s 2% target and thus potentially delay its easing cycle," adds Marinov.
Higher inflation expectations mean the European Central Bank (ECB) must pursue a steady approach to cutting rates, which can keep Eurozone bonds elevated and limit Euro exchange rate weakness.
"A confirmation of the above views and/or potential positive surprises could encourage Eurozone rate markets to adjust their excessively dovish ECB outlook and thus give the EUR-USD rate spread a boost," says Marinov.
Crédit Agricole says that EUR/USD continues to trade at a steep discount relative to its FAST FX short-term fair value of 1.0451 it estimates on the basis of the Euro-Dollar rate spread, among other drivers.
"We expect the FX pair to continue to close the gap to its rate differential in the near term as a result," says Marinov.