EUR/USD: Roadblocks For A Continued Surge; What’s The Trade?

EUR/USD is on the move, riding on the USD weakness that followed the FOMC minutes. What’s next?

Here is their view, courtesy of eFXnews:

Danske Bank FX Strategy Research notes that sentiment towards EUR/USD has changed as the recent surge has been driven by political risks reversing and by euro-area growth and equity outperformance.

Speculators have changed their minds”¦

“Since late 2016 speculators have markedly changed their attitude towards the euro: shorts have been covered and in early May non-commercial positioning in EUR turned net long for the first time since 2014. This suggests that risks are now roughly balanced for EUR/USD from a pure positioning point of view,” Danske notes.

What are the roadblocks for a continued EUR/USD surge?  

“Sentiment-/growth-related flows have seemingly been key in taking EUR/USD to this side of the 1.10 level, but we stress the potential for central banks to halt the uptick over the coming weeks.

In our view, it is a little too early for the ECB to signal an easing exit, and Fed is determined to move on with rate hikes and Quantitative Tightening (QT)…An ECB not ready to change signal on rates, and a Fed determined to both hike and initiate Quantitative Tightening should keep the cross in the  1.08-1.14 range within 3M,” Danske argues.

What’s The Trade?  

“Tactically, we would look for opportunities to sell the pair for a near-term correction  lower on ECB vs Fed policies,” Danske recommends.

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