Danske Bank FX Strategy Research notes that sentiment towards EUR/USD has changed markedly since the start of the year, with noncommercial positioning now net long the euro.
“This points to more balanced risks for EUR/USD but highlights the increasing risk of weakness in the cross if euro-zone euphoria fades, i.e. room for EUR longs to be liquidated. Equity flows have also reversed lately: upbeat sentiment regarding the growth prospects in the euro area have led US investors to start buying European equities, leaving the FX exposure unhedged to a larger degree,” Danske argues.
“If sentiment cools – possibly aided by a loss in euro-zone growth momentum – then flows may fade somewhat. Also, US investors may start to consider hedging recent equity price gains and picking up the positive carry obtainable via forward hedging. This would also be EUR/USD negative,” Danske adds.
In line with this view, Danske recommends short EUR/USD position* around 1.1167 targeting a dip towards 1.0850.
EUR/USD is trading circa 1.1215 as of writing.
Source: Danske Bank Research
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