📝See EUR/USD Fair Value Between 1.0350-1.0600: J.P. Morgan FX Strategy

EUR/USD weakening since mid-July has been driven by a combination narrower rate differentials and wider peripheral spreads. It also helped that at 1.12, EUR/USD was overshooting fair value by 2 cents. Our suite of usual workhorse models which account for rate differentials as well as peripheral spreads and relative commodity terms of trade indicate that 3.5-4% of the move since mid-July was account- ed for by wider peripheral spreads and 2% of the move by narrower rate differentials. Terms of trade has net-net been a drag for EUR/USD but impact on the currency has been mod- est. Contemporaneous fair value based on such models ranges between 1.0350-1.06.

The explanatory power of such models is lower but it is worth noting that the fair value for EUR/USD on rate differentials alone ranges between 1.02 and 1.0750. The lower fair value of 1.02 corresponds with 10-year rate differentials (Figure 5), which reflect that the compression in rate differentials in recent months has been led by the longer end, rather than by shorter tenors

- J.P. FX Strategy