Euro-Dollar Oversold Says Crédit Agricole

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The euro-dollar exchange rate is currently undervalued and oversold, according to Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Marinov highlights that despite persistent bearish sentiment surrounding the Eurozone's economic outlook, there are indications that much of the negativity is already reflected in current market prices. He states, "Our fair value estimates and FX positioning data signal that EUR/USD is undervalued and oversold."

Recent client meetings conducted by Crédit Agricole revealed that FX investors remain deeply concerned about the trajectory of the Eurozone economy. These concerns are largely driven by expectations that the European Central Bank (ECB) will implement further rate cuts, with market pricing suggesting a potential reduction of approximately 100 basis points this year.

Marinov notes, "The very negative sentiment is also evident in the current pricing of the Eurozone rates market, which suggests that investors expect the ECB to lower its policy rate by another 100bp this year."

Investor sentiment is further dampened by ongoing political uncertainties in Europe, the risk of a trade war with the United States, and the continued erosion of global market share for European manufacturers.

Collectively, these factors have led to fears that the Eurozone may enter a recession by 2025. "Lingering political risks in Europe, coupled with a potential trade war with the US and a persistent loss of global market share for European manufacturers, could push the Eurozone into a recession in 2025," Marinov warns.

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However, Marinov points to signs that the worst may already be priced in.

The euro has recently stabilized, and European stocks have rebounded since the beginning of the year, suggesting that sentiment may be shifting. "The EUR’s recent consolidation and the rebound of European stocks since the start of the year could suggest that many negatives are already in the price," he explains.

Looking ahead, the coming week’s Eurozone economic data calendar is relatively light, but key speeches from ECB policymakers Frank Elderson and Joachim Nagel could attract market attention. Investors will be scrutinizing their comments for signals regarding the ECB’s policy stance.

Should the ECB officials suggest that monetary policy is moving closer to a neutral position, investors may begin to moderate their aggressive expectations for rate cuts, which could provide a boost to the euro. "Signals that the Governing Council members believe that the ECB policy stance has moved closer to neutral could encourage investors to pare back their excessively dovish rate cut expectations," Marinov suggests.

EUR/USD movements will also be influenced by broader trends in the U.S. dollar, which remain sensitive to external factors such as remarks by U.S. President Donald Trump on tariffs, incoming U.S. economic data, and Federal Reserve communications.

While Trump’s trade policy statements could dominate near-term price action, absent new tariff announcements, investor focus may shift to key U.S. economic indicators and Fed commentary in the coming days.

With markets appearing overly pessimistic about the euro’s outlook, any shift in ECB rhetoric or a reduction in rate cut expectations could provide upside potential for the common currency.