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EUR/USD: After short squeeze, downside to play again - Rabobank

FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the EUR/USD is edging lower this morning, led lower by Draghi words but empowered by last week’s sharp reduction in short EUR positions.

Key Quotes

“A lack of consensus within the Governing Council may have been a restraining force on ECB President Draghi at last week’s policy meeting. However, Draghi used his speech in NY at the end of the week to try and reclaim his ultra dovish credentials by warning that there “cannot be any limit” on the policy responses the central bank may announce if necessary.”

“While Draghi’s sentiments seem to suggest that he would favour even more policy stimulus and a lower value of EUR/USD, this is unlikely to be tested for some time. Meanwhile, how the market reacts to next week’s FOMC decision is likely to be the largest single influence on the value of EUR/USD between now and the end of the month.”

“In the simplest of terms, the widening interest rate differential between the Fed and the ECB suggests that EUR/USD should reclaim its downside bias. However, we would warn that this may not be as straight forward at it may appear.”

“If the Fed laces a rate hike announcement next week with a dovish message, there is no guarantee that the USD will rally. Indeed, dependent on how market positioning advances over the next week, there is risk of a ‘sell on the fact’ reaction. Consequently the rest of the month could be characterised with further choppy trading conditions for EUR/USD.”

“Further out we do expect EUR/USD to trade lower on the back of interest rate differentials and we maintain a forecast of EUR/USD1.05 on a 3 mth view. That said, we remain reluctant to forecast parity for EUR/USD on this horizon based on the risk of a dovish tightening from the Fed later this month and the coincident reluctance of some ECB policy members to extend easing measures even more aggressively. Further out, our concerns that China growth concerns are likely to re-emerge in 2016 also make us reluctant to forecast parity for EUR/USD since this could impact the general level of risk appetite which in turn could constrain the build-up of EUR shorts.”

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