Euro Fundamentals Remain Strong, but Heavy Positioning a Clear Burden
Fundamental Forecast for EUR/USD: Neutral
- The Euro’s economic data trends remain strong, but stretched long futures positioning may mean the market is already saturated.
- Upcoming economic data are expected to continue to point to some of the best growth conditions over the past six years.
The Euro was the second worst performing major currency during the last week of November, with no clear catalyst for the pullback other than profit taking after a strong performance during the month. EUR/GBP was the worst performing EUR-cross, losing -1.36% as Brexit talks turned more positive for the UK, and EUR/USD dropped by -0.31%, as tax reform legislation in the US neared the finish line (with the Senate voting in favor of the tax bill after markets were closed on Friday).
Overall, the Euro has firm fundamentals to lean on, suggesting that any weakness should be shallow. Economic data momentum eased last week, but remains near multi-year highs, with the Euro-Zone Citi Economic Surprise Index finishing Friday at +70.3, down from +92.9 the week prior but still higher than +58.7 a month ago.
Otherwise, the 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of price pressures, closed last week at 1.700%, higher than the 1.656% reading a week earlier, and still higher than the 1.659% reading a month ago. Given broad Euro strength over the past few months, any signs that inflation is trending higher will ease ECB concerns over taper the pace of its asset purchases as the calendar turns into 2018.
Looking ahead, there is little on the calendar to help reinvigorate the Euro’s bull trend, or for that matter, to destabilize its pullback into a full-on reversal. The November Euro-Zone PMI and Q3’17 GDP releases are both their final versions, making the likelihood of any significant market impact rather minimal. If anything, exogenous influences like headlines regarding the Brexit talks or the reconciliation of the House and Senate tax bills in the US will be more potent drivers.
Market positioning would dictate that any weakness in the Euro in the near-term would be of the profit taking variety. Even though positioning has moderated in recent weeks, the Euro long trade remains crowded (relatively speaking). According to the CFTC’s latest COT report, there were 89.7K net-long contracts held by speculators in the futures market for the week ended November 28,near thehighest level since the week ended May 3, 2011 (when EUR/USD peaked just below 1.5000).
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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