Packs of 20-euro notes are seen at the Bank of Portugal Fortified Complex in Carregado, Alenquer, Portugal on May 17, 2022. Photo taken on May 17, 2022. Reuters/Pedro Nunes/File Photo Get licensing rights
ORLANDO, Florida, Sept 14 (Reuters) – The euro was already poised to weaken further before the European Central Bank’s latest rate decision, but the ECB sealed the deal, signaling that Thursday’s hike would be its last. Has given.
“Hold down longer” if you like.
Hedge funds and speculators are still heavily pressurizing the euro, the rate differential will go against it – especially against the yen and the dollar – and the euro zone’s comparative economic outlook is bleak, especially against the US.
Against that backdrop, could the euro soon try to catch up with the dollar? That’s 6% off, a notable but not insurmountable distance to cover.
“With changes in euro rate expectations from here, as well as the possibility of a US rate cut, downside potential for EUR-USD is the most attractive,” HSBC currency analysts wrote on Thursday after the ECB rate hike.
He expects the euro to weaken to $1.02 by the middle of next year.
From a market position perspective, the prospect of further euro decline is also attractive.
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The latest data from the Commodity Futures Trading Commission shows funds have reduced their net long euro positions to a seven-month low of 136,000 contracts, but that is still a big $18 billion bet that the euro will appreciate.
This is large by historical standards, and given the euro’s declining rate appeal relative to its peers, further cuts are likely in the coming weeks.
No euro sales are concentrated against the dollar. Just a few weeks ago the euro was at a 15-year high against the yen – pushing 160.00 yen – bringing its gains against the Japanese currency to 15% since March.
CFTC data shows funds and speculators have large net short yen positions worth about $8.2 billion. Compare this to the situation with the euro, and it is not difficult to envisage a potential narrowing of the gap in the coming weeks and months.
Development, policy paths diverge
Especially given the contrasting monetary policy outlook – just as the ECB is signaling the end of its tightening campaign, the Bank of Japan is revving its engines.
Deutsche Bank analysts now expect the BOJ to end its “yield curve control” policy in October instead of April 2024, and Japan’s negative interest rate policy to end in January 2024, about a year earlier than previously expected. Was.
In short, the euro may fall more against the yen than the dollar, although more attention will be paid to the US-euro zone divergence.
Economic signals from both sides of the Atlantic were telling on Thursday – US retail sales beat expectations and producer price inflation was higher than forecast, while the ECB cut its growth outlook to 0.7% this year and 1.0% next year. Gave.
No one knows what the future will hold – least of all economists – but while the US economy is flirting with a possible soft landing, the euro zone is flirting with a possible recession.
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Reuters Images acquired licensing rights
It appears that divergence is very well prevalent. Citi’s US Economic Surprise Index has been positive since May and the Eurozone index has been in negative territory since May.
In fact, barring the pandemic-related distortions of early 2020, the euro zone surprise index since July was at a low level last seen in the depths of the Great Financial Crisis.
How much of this is already factored into the euro’s exchange rate remains to be seen, but there is clearly nothing to suggest that the dollar rate and yield advantage will diminish any time soon.
Euro zone interest rate traders believe the ECB has raised rates, and are now betting on about 70 bps of rate cuts next year. US rate traders are still on the fence about another rate hike this year, and have recently been gradually reducing bets on a 2024 rate cut.
“Today’s ECB policy update and strong US data for the third quarter are further encouraging expectations that are weighing on EUR/USD,” MUFG’s Lee Hardman wrote on Thursday.
(The opinions expressed here are those of the author, a Reuters columnist)
By Jamie McGeever; Editing by David Evans
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.
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