The sovereign crisis led to deep-rooted market concerns about the political viability of the Euro area. Many investors initiated tail-risk hedges, often in the form of short EUR/USD positions. Since the ECB’s OMT announcement, the need for these tail-risk hedges has diminished and risk premia in many Euro area assets have declined since last July. This process can continue further.
“Several benchmarking exercises suggest a move to EUR/USD 1.40 is likely, but we would assume that Euro area and ECB policymakers would respond to currency appreciation beyond that level. Aside from political issues, the external balance of the Euro area remains in a very solid position, which stands in contrast to the situation in the US, and this relative picture is positive for EUR/USD.” the team adds.