Citi: EUR/USD Overvalued, Potential to Drop to 1.0530

Citi's forex analysts have expressed concerns about the recent rally in the EUR/USD pair, indicating that the rise has become excessive. The bank highlights two main factors behind the euro's strength: the European Union's fiscal spending plan and a softening in U.S. economic data. However, Citi warns that the currency is overvalued, particularly in comparison to relative real returns, noting that such levels have historically been temporary and followed by corrections.

Despite the optimism, the bank cautions that the expected economic impact of EU fiscal spending might not materialize until after 2026 due to the time required for domestic capacity building, resulting in low fiscal multipliers in the initial years of defense spending. Citi views the recent weakness in U.S. data, which has led to a rally in Treasury bonds and a sell-off in Bunds, as a temporary and excessive market distortion.