EUR/USD: the pair is overvalued, we expect a reversal of the trend (Merrill Lynch)

Merrill Lynch maintains its counter opinion on the EUR/USD and expects a downward reversal of the EUR/USD. ML believes that following the strong appreciation of the euro since last year, the EUR/USD is now balanced, but a little too early.

"The equilibrium level is the level at which an exchange rate should in theory converge when the two economies no longer have unemployment, have standardised their monetary policy and display a balanced balance of payments. Keeping these parameters in mind, it should be noted that the US economic recovery is ahead of that of Europe, suggesting that the EUR/USD should currently be below its long-run equilibrium level. It is therefore an argument that cannot support a new appreciation of the euro.

Indeed, we believe that the EUR/USD is already at this long-term equilibrium level (1.22). The euro is slightly overvalued because of the sharp decline in the dollar since the beginning of the year", says Merrill Lynch.