• We were stopped out of our short EUR/USD at 1.1100
• Technicals and positioning warn of further EUR/USD gains
• Fundamentally, we still see a lower EUR/USD on Fed, US growth
Strategy
We have been stopped out of our short EUR/USD recommendation (see Danske Bank FX Trading Portfolio, 9 April 2015). US data has continued to surprise on the downside in recent weeks (see Chart 2). Meanwhile, the market is currently re-pricing the eurozone, with 10Y bund yields today seeing their biggest 1-day change since September 2013 while eurozone equity markets were down sharply. As such, markets are appearing to capitulate on stalled long positions, including long USD. IMM positioning shows that short EUR/USD positioning remains at stretched levels which have made EUR/USD increasingly vulnerable to negative US surprises and positive eurozone surprises. Technically, the upside break of 1.1050/1.110 area and the 50-day moving average suggest further near-term EUR/USD gains. Today’s FOMC statement acknowledged the weakness in recent data but the Committee still viewed the soft patch in US growth as caused in part by temporary factors. This could trigger a brief pull-back in EUR/USD. However, our stop-loss level has been hit at 1.1100 and the trade is closed.
Fundamentals
Fundamentally, we continue to expect that EUR/USD will fall over the coming 3-6 months on relative monetary policy expectations. We expect the Fed will raise interest rates in September and believe that today’s FOMC statement supports our view. Our Fed call should be compared to current market pricing of a December take-off. Historically, the USD tends to strengthen during periods when the Fed stops easing and until it starts to tighten. We see no reason why it should be different this time, particularly as we expect the ECB to continue its quantitative easing programme until at least September 2016. We expect that the current weakness in US data is a soft patch in the economy and expect growth to pick up during the year. We forecast US GDP growth at 2.5% in 2015 after the sluggish Q1 GDP data at 0.2% q/q SAAR.
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