From the FXWW Chatroom: Buy EURUSD 1.2335, target 1.26, stop loss 1.2185
Negative news-flow for USD comes at a more precarious time. Our flow analysis shows that USD buying recently touched its highest levels in more than a year among the leveraged sector, while there has been a pause in outflow from USD among real money investors. This means that the flow backdrop has unusually supportive of USD compared to recent history and may threaten renewed deterioration moving forward. More recent slowing in leveraged sector buying may signal that the previous surge is overstretched.
This probably goes some ways to explaining USD (negative) sensitivity to last week’s announcement that President Trump intends to pursue tariffs on steel and aluminum imports. The details of potential trade action remain unclear and may be fluid ahead of expected action this week, but this underscores that policy appears to be shifting in favor of more hawkish outcomes. We anticipate ongoing drag on USD from this factor in the days ahead, with outperformance from non-USD safe-havens.
Clarity on parliamentary seat counts in the wake of the election is unlikely to come before Monday European time. However, EUR has weathered initial headlines showing somewhat stronger performance in exit polls from M5S and weaker performance from the Centre-right coalition. While this has historically not been an accurate gauge of final seat allocations, it would be a surprise if this did not result in a hung parliament. Thus it is likely to be a period of months before a government is formed and even if anti-establishment parties (M5S and Lega) were to backtrack on earlier suggestions they would not form a coalition, it remains unclear that there will be major shifts in policy.
If EUR has been unable to muster a sell-off as this outcome has begun to take shape, it is not clear why it should see more pressure on confirmation that this is the case in the hours ahead. We therefore favor buying the slight dip.
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