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Credit Agricole discusses EUR/USD outlook and maintains a cautious bias over the coming weeks.

  • “The positive correlation between EUR/USD and the outperformance of the Eurozone stocks vs their US counterparts has been further highlighted as evidence that investors are rotating out of the USD and into the EUR. Behind the supposed rotation out of the USD are investors who are selling US technology stocks or looking to invest the pile of USD-cash that they were left with after last year’s market sell-off. While we agree that the USD is no longer the attractive currency it once was, we struggle with the notion that the EUR could replace the USD in FX investors’ hearts,” CACIB notes.
  • “In particular, we think that even if European energy prices were to retreat further, they are likely to remain much higher than in North America or other parts of the world and thus to continue robbing Eurozone consumers of their purchasing power and eroding corporate profitability. This should depress domestic demand in the Eurozone at a time when the ECB’s rate hikes lead to further tightening of European financial conditions and thus keep the risks to the outlook tilted to the downside,” CACIB adds.

EUR has caught a tailwind from investor perceptions that the Fed will soon slow its pace of rate hikes, and the terminal rate will not be as high as the Fed has forecast.

We’ll get further clues to the path ahead for the Federal Open Market Committee (FOMC) tonight:

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