The EUR/USD decline below the 1.35 level this week has generated plenty of medium-term bearish signals, notes Morgan Stanley.
"We also note that the 50-day moving average has moved below the 200-day moving average during this month, which is likely to trigger a reassessment by longer-term investors," MS adds.
"The significant underperformance of European equity markets over the past month, plus the renewed decline of EUR, is likely to leave foreign investor returns for the month sharply lower, suggesting that some portfolio adjustment is possible – the Eurostoxx is currently down 3.85% on the month in USD terms," MS argues.
In this regard, MS thinks that the survey data from Germany Ifo on Friday will be an important release to watch.
"Any weakness here is likely to add to the pressure on EUR, in our view, and we look for further losses into the 1.3295 area, with 1.3100 targeted over the medium term," MS projects.
In line with this view, MS maintains a short EUR/USD position as a short-term trade recommendation from 1.3600, with a revised stop at 1.3550, and a target at 1.31. MS holds a similar position in its medium-term portfolio from around the same entry (1.3620), with a revised stop at cost and a target at 1.31.
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