FX Trade Idea—Sell EURUSD

From the FXWW Chatroom: We recommend selling EURUSD at current levels. Our
initial target is a move to challenge support in the
1.0250/1.0200 zone but we see scope for further
downside if this achieved. On an entry of 1.0540, we have
placed our stop at 1.0880, just above the 8 December
spike high.

 After a brief period of consolidation, we think the latest
upward correction in EURUSD is now complete. Shorter-term
positioning now appears cleaner, in our view; the daily RSI
has reverted back to the midpoint of its range after reaching
deeply oversold levels in mid-November. While we had
hoped to enter EURUSD shorts at better levels on a move
above 1.09, that now appears unlikely. With the Fed shifting
toward an incrementally more hawkish footing, we think
momentum is likely to favour the downside as the primary
trend lower resumes.
 We maintain a high-conviction USD bullish stance and
expect the dollar’s rally to continue into Q1. We are currently
long USD against a portfolio including the CAD and the NZD.
We also look for extended gains against most other G10
currencies, such as the AUD and JPY. US reflation dynamics
are gaining broader traction while the USD has joined the
ranks of the top-tier ‘high yielders’ among G10 currencies.
While the Fed has retained its dovish rhetoric, this is only
likely to slow—not prevent—the widening policy and macro
divergence between the US and other major currencies.
 With the ECB delivering a ‘dovish taper’ this month, monetary
policy remains highly expansionary in the Eurozone. As a
result, yield differentials between benchmark 2Y USD and
EUR swap rates are wide and getting wider. Other key
Eurozone short-term rates, 2Y German schatz for example,
continue to trend lower. This points to sustained downward
pressure on EURUSD in the weeks and months ahead.
 European political uncertainty is only likely to increase as
2017 gets underway. Amid a persistent possibility of early
elections in Italy, investors will soon turn their attention to the
upcoming contest in France. Against this backdrop, a
measure of policy uncertainty has returned to levels not seen
since June’s Brexit-related all time highs.
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