Date: 22 Jun 2017

Japan’s Bank of Tokyo-Mitsubishi UFJ (BTMU) believes that “sentiment toward the euro is changing and this outcome can only reinforce the more positive sentiment over the short-term,” noting that “the IMM speculative positioning data revealed a further modest increase in long positions in the week to last Tuesday following the turn the previous week to long positions for the first time since mid-2014 when negative rates were adopted by the ECB for the first time.”  It is BTMU’s contention that “this more improved EUR sentiment looks set to persist for now.” BTMU is not alone. Dutch bank ING argued earlier in the week that “for FX markets, a mostly neutral dollar outlook means investors can chase growth or re-rating stories.” ING sees the euro as one of those re-rating stories and is forecasting euro/dollar (EURUSD) at “1.15 and 1.20 for end 2017 and 2018.” In their view “a broadening Eurozone recovery will [the market to] question why the EUR remains so cheap – especially now that 2017 Eurozone political risk has been overcome” and that “tentative ECB tapering should provide the catalyst for the EUR in 3Q17.” US firm BNYMellon also feels that there is

US firm BNYMellon also feels that there is potential upside for the euro although its stance is more nuanced. “Though political risks have receded, perhaps the biggest hurdle facing the euro-zone is lurking over the horizon in the form of policy normalisation, or the removal of stimulus that could once again leave the euro-zone’s divisions open to market forces,” wrote BNYMellon at the start of the week. “However, for the time being, the market may be willing to give Mr Draghi’s stoical take on the euro-zone outlook the benefit of the doubt (despite a dichotomy in growth and inflation that if anything, has become more pronounced),” the US firm added, noting that “if stronger demand for the EUR does indeed materialise, then the top of its post-2014 range with the USD may feasibly come into focus.”Only time will tell but traders will have noted how the euro/dollar reacted on Tuesday when the Fed’s William Dudley echoed the more hawkish tone adopted last week by Fed Chief Janet Yellen. Given that US firm Morgan Stanley’s FX Positioning Tracker suggested that this week began with the long euro position being the largest of long positions in the G10 space, perhaps even the most bullish of euro bulls might admit that, even if the euro might be continuing a gradual ascent, there is a risk it may double back on itself along the way.

Written by Neal Kimberley, External Currency Analyst.