3 Reasons Why EUR/USD Upside Limited; We Stay Short –

EUR/USD has recovered, but certainly didn’t go too far and is struggling to advance. Some see the recent slide as a correction within a change of course and see more upside.

However, the team at BNP Paribas notes 3 reasons why the upside for the pair is limited. They set lower targets:

Here is their view, courtesy of eFXnews:

The USD is regaining composure in the aftermath of last week’s soft jobs data, although US yields remain under pressure.

In this regard, BNP Paribas doesn’t believe that the US soft payroll number marks a major turnaround to the US dollar uptrend and to EUR/USD downtrend accordingly. BNPP outlines 3 reasons behind this view:

“First, our economists continue to see 70% probability of a Fed hike by September and comments from New York Fed President Dudley on Monday did not signal excessive alarm over the jobs report that would change the Fed’s base case scenario for policy tightening this year,” BNPP clarifies.

“Second, rates markets are already expecting a much more dovish outcome than the Fed, with less than two hikes priced in over the next year, implying that the scope for US yield upside is much larger than the downside,” BNPP argues.

“Finally, foreign central bank policy, notably QE by the BoJ and the ECB, is supporting the underlying asset-reallocation flows that benefit the US dollar as investors in the eurozone and Japan are pushed into overseas markets in search for more attractive nominal and real yields. The latter point is underscored by EURUSD’s inability to spend any much time above 1.10,” BNPP adds.

In lie with this view, BNPP remains short EUR/USD via spot from 1.099 targeting 1.04. 

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