IMM data released last Friday revealed that investors for the third consecutive week added bearish EUR builds. The move in the EUR has sent non-commercial positioning in the single currency to the 4th percentile - the most bearish level since Draghi's famous 'Whatever it takes' speech in July 2012. This week's bearish build reflects speculations of a dovish Draghi at the ECB meeting on 4 September and as we now know, Draghi took markets by surprise by cutting both the repo and the deposit rate (see ECB cuts policy rates further).
This suggests that the sensitivity of the single currency to the upside has increased more than what this week's report suggests. Having said that, we believe that there is much more than rate expectations behind the EUR weakness and the USD strength and we believe that the bearish EUR/USD sentiment is currently very resilient. This was illustrated on Friday when EUR/USD barely bounced, even though the US non-farm payroll report came out significantly weaker than expected. We, therefore, still expect EUR/USD to gradually edge lower in the coming weeks despite the stretched positioning.
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