While simmering trade tensions have been a key driver of FX markets this year, optimism about a potential ceasefire deal in Ukraine and stronger fiscal support, especially from defense spending, have also raised the prospects of a better outcome for European growth. Our economists have raised their forecast for growth in the years ahead and see even more potential upside from a ceasefire deal, suggesting a positive impulse to EUR/USD, which markets have already started to price.As a rule of thumb, a 1pp upgrade in year-ahead Euro area growth expectations is worth about 1.5% on EUR/USD. But the currency is already close to “fair value” on a trade-weighted basis, the current account is back to normal, and the expected boost to growth is more back-loaded than the market typically credits. This is consistent with our view that some of the recent Euro strength is justified by evolving fundamentals, but demonstrates that the market is either overly optimistic on the near-term boost or giving more credit to longer-term developments than is typical.At the same time, it is important to keep in mind that our economists still anticipate tariffs on at least some European goods, underscoring our more negative outlook for growth this year. The changes providing the positive impulse discussed above are at least in part a response to shifting US policies, and to some degree the “other shoe” has not dropped yet. If tariffs and trade uncertainty weigh more heavily on European growth, EUR/USD could see greater downside.This is why we think the current equilibrium for the Euro looks unstable. Markets continue to price only a small tariff premium in the currency and we think their implementation will ultimately take the cross back lower. At the same time, if tariff policy changes are smaller than markets expect—perhaps in part due to pro-active EU policies—then the currency could rise further. Recent changes have already raised the risks around our forecast for more substantial depreciation. Despite the lingering uncertainty and “fat tails”, implied volatility in EUR/USD has declined since the start of the year. While it may take some time to realize these tails, long vol expressions screen as an inexpensive way to position for a more stable equilibrium in the currency.