Morgan Stanley notes a divergence between EUR/USD and core European yields.
"The current EURUSD rebound is developing despite core yields still heading lower. This is the most significant divergence seen during the EURUSD downtrend over the past year," MS clarifies.
"Again, we believe this implies that the EUR rebound is likely to prove temporary and will eventually provide a renewed medium-term selling opportunity," MS argues.
Moreover, MS FX Positioning Tracker suggests that there has been a significant unwinding of short EUR/USD positions recently.
"Compared to this positioning adjustment, the rebound in EURUSD has remained moderate so far, which could be a function of the structural (funding) outflows from the eurozone, keeping the EUR rebound limited," adds.
"Hence, while we would expect some further near-term gains, scope is likely to remain relatively limited. We maintain a tactical trading strategy for the time being," MS projects.
In line with with this view, MS maintains a tactical EUR/USD long position from 1.0710 targeting 1.1080.
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