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When the entire universe was blowing out of the proportion with EURUSD’s bullish rout through rest of the 2017 and 2018, we at FxWirePro had suspected minor obstacles complicated by US inflation, US politics & an ECB response.
Unless one makes a habit of being contrarian as an attention-seeking tactic, it is difficult to credibly propose non-consensus views very often. A bullish outlook on the euro for 2018 has been one of our occasional ones, though we underestimated how quickly the currency could rise above 1.15.
Do you think that the recent pace of euro gains was unsustainable? Our recent technical section on this pair did not rule out a minor bearish sentiment amid robust uptrend, a significant level which now fast approaching (upper bound of the past range, 2015 and 2016 peak).
However, past euro weakness essentially coincided with ECB QE, which still has to be reversed, a move that should propel EURUSD towards 1.20.
Only because Draghi did not use the opportunity in recent time to refer to the current EUR strength does not mean that he is totally relaxed about the development of the exchange rates. And in view of a trade-weighted appreciation of just above 7% since April it is not unlikely that the exchange rate has already had an effect on the growth and above all inflation projections of the central bank.
Also, euro area GDP confirmed the broadening economic upturn, supporting a stronger euro into year-end. So the EURUSD pullback should be temporary and a buying opportunity.
Defused bearishness:
None can deny that EURUSD is consolidating as it is digesting several risks which are thus losing their potential of bearish surprises, limiting the extension of the pullback:
FOMC minutes confirmed the growing expectations of the Fed putting balance sheet reduction. This should have much less FX impact than actual Fed Funds hikes during this Christmas season and in 2018.
ECB minutes expressed concerns about “the risk of the FX rate overshooting in the future”.
We had largely exited short USD/long Europe positions in prior weeks but were nevertheless stopped out from a residual EURUSD long as US tax hopes took flight again.
We re-enter EURUSD through a 2m call, not necessarily because we believe Fed pricing is a fade, rather that 1) the passage of tax reform will not be straightforward, and 2) European reflation remains very much on track. Aside from EURUSD, the portfolio is neutral on USD and focused instead on RV macro trades.
That being said, the handful of trades has performed poorly as momentum in rate re-pricing has stalled and the next convincing reflation candidate has yet to emerge.
