Richard Franulovich, head of FX strategy at Westpac, suggests that the EUR/USD pair is now in its fifth month of narrow range trading (circa 1.12-1.15) and they find it to be mildly overvalued, with the currency’s equilibrium estimated at 1.1100.
“It is consistent with trends over the last several years, with EUR/USD trading consistently above fair value. However, and perhaps more importantly, we find that amid all those aforementioned competing forces EUR/USD fair value has been grinding higher – on balance the positives have outweighed the negatives.”
“On our estimates EUR/USD equilibrium has risen around US2.5 cents in the last four months.”
“Despite the amid the myriad of competing forces EUR/USD fair value has been slowly grinding higher, but the currency is slightly overvalued and that arguably accounts for the currency’s range bound behaviour in recent months.”
“Separately, implied volatility has declined considerably in recent weeks, understandably given the growing likelihood of a Brexit extension, the Fed’s dovish turn, and signs of a trade war truce. The decline in implied major currency vols however continues to look considerably out of kilter with various measures of global policy uncertainty.”