EUR/USD: Overvaluation and Energy Risks Weigh – MUFG

EUR/USD is currently at 1.15776, remaining in a pressured pattern below the 200-day moving average of 1.1630. MUFG analyst Halpenny notes that the exchange rate is overvalued by 2.5%-3.0% according to the bank's short-term model, with neither technical nor valuation signals indicating an upward breakout.

**Overvaluation Limits Upside Potential**

According to MUFG's estimates, EUR/USD currently deviates from its short-term fair value by approximately 2.5%-3.0%, implying that even if the dollar weakens periodically, the flexibility for further upside in the euro remains relatively limited. The 200-day moving average sits near 1.1630, constituting technical resistance that is difficult to break through in the near term. The exchange rate is now at 1.15776, roughly 50 points below this average, but after multiple failed attempts, market pricing for upside space has turned cautious.

**Energy Risks Erode Yield Support**

Halpenny warns that energy-driven growth risks are accumulating. Europe's high dependence on energy imports means that if energy prices rise again, it would simultaneously squeeze corporate profits and households' real purchasing power, thereby dragging down growth expectations. Broader inflationary pressures may also make the European Central Bank more hesitant in its policy path, weakening the euro's yield support relative to the dollar. Should the interest rate differential logic reverse, the euro faces a risk of underperformance.

**External Variables Still Need Monitoring**

Developments in the Middle East situation and trends in European energy prices are key variables going forward. If energy risks ease, the euro may gain some respite; conversely, overvaluation combined with growth headwinds could amplify downward correction pressure. Market information indicates that directional positioning on the euro remains cautious, with institutions tending to wait for clearer breakout or breakdown signals near the 200-day moving average before positioning.