EURUSD: Opportunity to re-load shorts - TDS

Ned Rumpeltin, European Head of FX Strategy at TDS, thinks that the recent rise of EURUSD above the 30 December spike high of 1.0653 suggests a further upward correction may be due in EURUSD.

Key Quotes

“USD longs have come under broad pressure in the aftermath of the President-elect’s press conference Wednesday. This event has done little to boost the FX market’s confidence on the incoming administration’s policy priorities with respect to the economy. Indeed, currency investors were left with precious little to sink their teeth into as the focus was clearly on other political considerations. In particular, the PEOTUS offered little guidance on the expected fiscal stimulus and other issues of economic importance.” 

“Looking forward, we think the rise above the 30 December spike high of 1.0653 suggests a further upward correction may be due in EURUSD. We continue to believe that the current environment represents a correction, rather than a reversal, of the larger downtrend. We largely anticipated this development and were looking for a mild drawdown against some G10 currencies around the turn of the year. Unfortunately, this process has included the EUR and the 1.0850/75 zone becomes the next major area of focus.”  

“Policy divergence between the Fed and ECB remains a key driver. The ECB may provide further guidance but we expect the overall message from December to remain intact. At the same time, the Fed is shifting toward an incrementally more hawkish footing. This should help return momentum to the downside in the weeks ahead.” 

“We intend to view this latest uptick in spot as an opportunity to re-load EURUSD shorts from better levels. Importantly, we note that the move higher in spot has not been validated by similar developments in rate differentials. This, in our view, emphasises the likelihood that the rally seen in EURUSD will not be sustained.”  

“We continue to maintain a broadly bullish stance toward the USD. We remain long USD against a portfolio including the CAD and the NZD. While these positions are also looking somewhat vulnerable to a similar position squeeze— USDCAD in particular–we believe the fundamental backdrop remains constructive for the USD over the medium term. US reflation dynamics are gaining broader traction while the USD has joined the ranks of the top-tier ‘high yielders’ among G10 currencies. This should continue to provide support through much of H1 this year.”