Euro: Overvaluation and energy risks weigh against US Dollar – MUFG

MUFG’s Halpenny notes that EUR/USD remains capped near its 200-day moving average at 1.1630 and is 2.5%-3.0% overvalued in the bank’s short-term model. He warns that energy-driven growth risks and broader inflation pressures could weaken yield support for the Euro, leaving it vulnerable to underperformance.

Euro faces technical and macro headwinds

"The worsening US dollar sentiment following the data releases last week that has helped ease Fed rate hike expectations has not translated into any great sell-off – as mentioned yesterday, DXY remains supported above the 200-day moving average level of 99.185. "

"A break of that level could add momentum to this dollar turn and extend the move. With EUR key in the DXY basket, the equivalent EUR/USD level is close as well – the 200-day moving average is offering resistance at 1.1630."

"Yield has played a key role supporting EUR but that support would likely start to fade if growth concerns pick up on energy price concerns or signs of broader inflation in for example food."

"Our short-term regression model for EUR/USD already indicates current spot is about 2.5%-3.0% overvalued and if these factors start to impact sentiment and economic activity, we could start to see EUR underperform."

"Today’s ZEW Expectations index will be interesting to see whether any of these risks are beginning to play a role in dampening sentiment. It could be a signal of building downside risks for EUR over the coming months."