EUR/USD has been steady in recent months – Westpac

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.

Key Quotes

“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.”