EUR/USD: 10% gain in the last three months suggests elevated risks of correction – MUFG

Analysts at MUFG Bank, changed their short-term bias from bullish to bearish in EUR/USD. They see the pair moving in the 1.1500-1.2100 range. However, on the medium term, they expect the dollar to weaken further. 

Key Quotes:

“We believe the risk-reward balance has shifted notably and we have therefore shifted our short-term bias from bullish to bearish. This is not to take away from our long-held bullish view for EUR/USD. We believed levels close to 1.1000 incorporated excessively negative sentiment in relation to the euro but there is a strong case to be made that the scale of the move in three months certainly warrants some caution. In the 3mths to 5th August, EUR/USD advanced by 10% – the largest percentage gain since April 2011. Aggressive Fed monetary easing and the resulting collapse in US yields relative to core euro-zone yields help explain that move.”

“There are a number of factors that look to us plausible factors that could prompt some correction lower over the coming weeks. Firstly, the relative COVID backdrop is beginning to change. The pace of spread in the US is slowing (…) Secondly, while the FX/risk correlation is slowly fading as market volatility subsides, we believe a correction lower in global equities would fuel renewed USD demand. (…) There could also be some renewed uncertainties over the implementation of the EU Recovery Fund that has played a key role in EUR appreciation. Finally, positioning has changed notably in recent weeks.”

“So while we see reason over the medium term for the USD to weaken further, the 10% gain in EUR/USD in the last 3mths suggests elevated risks of some correction lower over the short-term.”