National Bank of Canada (NBC) strategists Stéfane Marion and Kyle Dahms describe an uneven near-term backdrop for the Euro (EUR), citing elevated geopolitical risk, high energy costs and weak growth. They still project modest EUR/USD appreciation into year-end as the European Central Bank (ECB) stays cautious and valuation normalizes. However, they stress that the Euro is no longer clearly cheap, implying only gradual upside unless growth or energy dynamics improve.

Modest upside after potential setbacks

"The euro has recovered from the multi-month lows reached in March, but in our view the near-term balance remains uneven. Elevated geopolitical risk, still-high energy prices and a soft growth backdrop leave the currency exposed to bouts of risk-off weakness."

"That leaves the ECB in a holding pattern. The Governing Council has acknowledged that upside inflation risks, and downside growth risks have both increased, but longer-term expectations remain sufficiently anchored to justify patience."

"That said, we continue to expect this weakness to give way to modest appreciation by year-end, supported by a more stable policy backdrop although valuation is no longer a clear tailwind with the euro’s REER close to its long-term average."

"Overall, we see a two-stage path: potential short-term weakness if geopolitical risk keeps energy prices elevated and weighs on risk appetite, followed by modest appreciation into year-end as the shock is absorbed and the ECB remains cautious rather than dovish."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)