EUR: Upside vs USD Capped Above Fair Value – Scotiabank

EUR/USD is consolidating in the mid-to-upper 1.16s, trading near 1.16702. Scotiabank strategists Shaun Osborne and Eric Theoret note in their latest report that while stronger-than-expected German IFO and GDP data bolster the ECB's confidence ahead of the September meeting, the fair value level implied by yield spreads is limiting further upside for the euro.

**Spread-Driven Fair Value Rises, But Forms Short-Term Ceiling**

The report highlights that the narrow fair value estimate, based on the 2-year yield spread between Germany and the US, has risen to a new high of 1.1641. This level is above the previous spot price, providing fundamental support for the euro. However, strategists believe that the upside for EUR/USD is now capped above this fair value, suggesting that even with bullish market sentiment, the exchange rate may face greater resistance above the 1.1641 area. The current rate of 1.16702 is already slightly above this fair value estimate, indicating that the market is testing this key level.

**Technical and Sentiment Factors Offer Support, But Position Risks Loom**

From a technical perspective, Scotiabank notes that the RSI has moved back above 60, signaling renewed bullish momentum. The recent consolidation range provides solid support at 1.1500, while the 200-day moving average (1.1630) offers additional resistance. Strategists also warn that the options market continues to erode protective premiums against euro weakness, and bearish CFTC positioning data, amid improving spread fundamentals, highlight positional fragility, suggesting further upside tied to sentiment and positioning remains possible, but the path may be volatile.

**Data Improves Central Bank Confidence, But Does Not Alter Overall Picture**

The report mentions that the second release of eurozone GDP data met expectations, with a quarterly rate of 0.4% and an annual rate of 1.0%, while the June trade balance returned to a surplus. These data should bolster the ECB's confidence ahead of the September 10 meeting but do not fundamentally change the short-term framework for EUR/USD. The strategists maintain a bullish view but explicitly flag resistance above fair value.