This week could prove more pivotal than those currently trading FX markets expect. As we wrote in our latest FX Weekly, firming Fed tightening expectations could trigger something of a USD fundingsqueeze chain-reaction across FX markets. We’re not quite there yet, but this week’s key US PCE deflator and Payrolls evidence could be enough to provide the necessary catalyst sending USD higher and peripheral significantly currencies lower.
Thus with Greek concerns still loading extra weight upon EUR as this week's first June IMF repayment looms we remains comfortable with our short EUR/USD position.
This is not to say we disregard the potential for a EUR/USD squeeze if news of a still dissatisfying Greek agreement emerges, but rather we’d ride it out and sell into it rather than capitulate.
Even in the case of more positive developments in the days ahead, we remain of the view that the single currency is facing only limited upside risk from the current levels, especially ahead of this week’s ECB monetary policy announcement. There is little likelihood of ECB President Draghi sounding less dovish. On the contrary, medium-term inflation expectations returning to multiweek lows may suggest that domestic conditions are not yet strong enough to stabilise price developments sustainably. Given the central bank’s strong focus on the EUR itself as a driver of price developments, it is possible that the currency will be mentioned.
As a result we remain of the view that EUR rallies should be sold, in particular against the USD.
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