Euro/dollar: Assessing Risks
As the new trading week begins, albeit with UK and US public holidays, Friday's upwardly revised US first quarter GDP estimate arguably nailed on a June rate hike by the Federal Reserve.
But if that's priced, and if the currency market also continues to harbor doubts about the chances of US President Donald Trump pushing through his fiscal agenda, then the next drivers of the euro/dollar (EURUSD) exchange rate may emanate from the eurozone rather than from the United States.
As it currently stands, although Germany's Chancellor Angela Merkel has reiterated her view that the euro was too weak for Germany, European Central Bank chief Mario Draghi has also reaffirmed his view that currently there is no need for the ECB to deviate from its present monetary policy path.
As both factors must already be priced into the euro's value, perhaps the looming ECB meeting on June 8 will start to preoccupy traders more.
But if the currency market has been conditioned by Draghi to expect no deviation from current policy, then traders might logically conclude that the risk to the euro is that the ECB ends up being slightly more hawkish when it meets next week.
But June 8 is still a fair way off. Viewed through the prism of existing positioning, it could be argued that with a large short euro/dollar position having been unwound and reversed in recent weeks, traders might consider the market has got ahead of itself.
US Commodity Futures Trading Commission data released last Friday showed net long positioning on the euro versus the US dollar at its highest level since March 2014. Euro bulls might want to buy a dip in EURUSD but might also fear to miss the boat.
Written by Neal Kimberley, External Currency Analyst.
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