Strategists Stéfane Marion and Kyle Dahms from the National Bank of Canada (NBC) describe the Euro's (EUR) near-term outlook as uneven, citing elevated geopolitical risk, persistently high energy costs, and weak economic growth as key factors weighing on the currency. They note that while the euro has recovered from multi-month lows reached in March, the current environment leaves the currency vulnerable to periods of risk-off weakness [1].
The European Central Bank (ECB) is described as being in a holding pattern, with the Governing Council acknowledging both increased upside inflation risks and downside growth risks. However, longer-term inflation expectations are considered sufficiently anchored to justify a patient policy stance from the ECB [1].
Despite these challenges, NBC strategists project modest appreciation for EUR/USD into year-end, supported by a more stable policy backdrop. They caution that the euro is no longer clearly undervalued, as its real effective exchange rate (REER) is close to its long-term average, suggesting only gradual upside unless there is improvement in growth or energy dynamics [1].
NBC outlines a two-stage path for the euro: potential short-term weakness if geopolitical risks keep energy prices elevated and dampen risk appetite, followed by modest appreciation as these shocks are absorbed and the ECB maintains a cautious, rather than dovish, stance [1].
CONCLUSION
NBC strategists anticipate a gradual strengthening of the euro by year-end, despite near-term vulnerabilities from geopolitical and energy-related risks. The ECB's cautious approach and the euro's current valuation suggest only modest upside unless economic or energy conditions improve.