From the FXWW Chatroom: Buy EURUSD 1.2335, target 1.26, stop loss 1.2185

Citi Trade Notes.

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.

· Risks are skewed to the downside for USD on average hourly earnings. In addition to FX positioning, lean in money- and fixed-income markets seems to be in favor of stronger price data, pointing to risk for disappointment if recent strength in rate expectations and yields is not validated by the data on the ground. We would not rule out a disappointing reading given unfavorable base effects, more favorable weather and potential for reduced impact from one-off factors such as announced wage increases on the tax cut.
· Politics are unlikely to deter EUR buying. While USD drivers appear to have been the main force behind EURUSD moves, a shift to discount lower European political tail risk could prove supportive. The SPD vote over the weekend formalizes Germany’s Merkel led coalition and the Italian election outcome does not appear likely to derail EUR strength.

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.

View the latest market information in the FXWW Chatroom with a free trial.

Leave a Reply

Your email address will not be published. Required fields are marked *