Citi says EUR/USD is overvalued, sees a potential drop to 1.0530

Investing.com -- Forex analysts at Citi have expressed concerns over the recent rally of the EUR/USD currency pair, suggesting that the surge appears overdone.

The bank points to two main drivers behind the euro’s strength: the European Union’s fiscal spending plan and a softening of U.S. economic data. However, Citi warns that the currency’s overvaluation, particularly when compared to relative real yields, is excessive and such levels have historically been temporary and followed by a correction.

Citi’s analysis indicates that the market sentiment is excessively bullish on the euro, as evidenced by the premium for calls over puts reaching historically high levels, often associated with previous tops in the EUR/USD exchange rate.

Despite the optimism, the bank cautions that the expected economic impact of the EU’s fiscal spending will likely not materialize until after 2026, with defense spending having low fiscal multipliers in the initial years due to the time required to build domestic capacity.

The recent weakness in U.S. data, which has led to a rally in Treasury bonds while Bunds have sold off, is seen by Citi as a temporary and extreme market dislocation. The bank’s Rates Strategy team has initiated a trade positioning for this adjustment, going short on 10-year U.S. Treasuries versus long on 10-year Bunds.

Citi remains concerned about the U.S. labor market and anticipates the U.S. unemployment rate to rise to 5.0% by mid-year, which could start to affect global growth perceptions.

Further complicating matters are escalating trade tensions, with Citi disagreeing with the view that tariffs on Canada and Mexico are merely negotiation tactics. The bank expects tariffs to be implemented and sustained, noting that reciprocal tariffs will likely have a negative impact on the euro, especially considering Europe’s large trade surplus with the U.S. and the potential treatment of VAT as a tariff.

From a technical perspective, the EUR/USD is testing a key resistance area, with recent momentum allowing it to break through previous resistance levels. Citi acknowledges the possibility of a significant correction that could see the EUR/USD pair retreat towards the breakout area around 1.0530.

The bank also notes that EUR positioning has shifted to a slight long, indicating that the immediate squeeze from positioning may be over.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.