Euro at Risk: Overvaluation and Energy Risks Weigh on USD Pair

MUFG analysts have warned that the euro's current overvaluation and lingering energy-related risks could exert downward pressure on the euro against the US dollar. Despite a relatively hawkish European Central Bank stance, Europe's energy dependence and potential for renewed supply disruptions pose significant downside risks to the currency.

The Japanese bank highlights that the euro may be trading above its fair value, making it vulnerable to corrections. MUFG points to Europe's energy landscape as a structural concern, noting that any disruption to supply could reignite inflation and hurt economic growth.

According to MUFG, the euro's overvaluation is partly due to earlier optimism about the region's fiscal response to the energy crisis. As that optimism fades, the currency may revert to levels more aligned with economic fundamentals.