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As a new week is about to begin,  many ask:  can the euro continue falling?

The team at BNP Paribas provides a clear answer and lists 5 reasons for this:

Here is their view, courtesy of eFXnews:

In its weekly FX note to clients today, BNP Paribas discusses why EUR/USD short positions are attractive again particularly from a risk-reward juncture. The following are the key reasons outlined in BNPP’s argument along with the details of its current short EUR/USD position.

1-  Greek outcome still favours EUR weakness. “The EUR’s attempts to rally on positive Greek news proved short-lived this week. As we have long argued, a return of positive risk sentiment re-encourages markets to rebuild long risk positions funded in EUR,” BNPP argues.

2- EUR less vulnerable to positioning squeeze. “EUR short positions now stand at -6 versus a high of -35 this year (on a -50 to 50 scale) according to BNP Paribas positioning analysis. This suggests markets have more scope to rebuild EUR shorts and should be less vulnerable to a positioning squeeze should risk sentiment deteriorate again,” BNPP notes.

EUR shorts have been scaled back US rate expectations very benign

3- ECB can only maintain or increase QE. “There were few surprises at the ECB policy meeting this week…We think the bottom line is that the ECB stands ready to counter any economic weakness or market volatility with even easier policy, which would be negative for the EUR,” BNPP argues.

4- US rates have substantial upside. “There is still substantial scope for an upward adjustment in US front-end yields, which should be supported by the recent improvement in risk sentiment,” BNPP projects.

5- Real rate spreads are bearish for EUR/USD. “We see scope for both US nominal rates and eurozone inflation expectations to push the spread even further against EURUSD, but even at current levels it is sending a clear bearish signal for the pair,” BNPP adds.

The trade: In line with this view, BNPP maintains a short EUR/USD position from early this week from 1.1025 targeting a move to 1.05, with a stop trailed to entry.  

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