EUR/USD door open for a correction lower – Danske Bank

Aila Mihr, Analyst at Danske Bank, suggested the pair faces downside risks in the near term

Key Quotes

“We increasingly see the risk of a possible slide within EUR/USD’s recent range near term. Notably, our equity strategists are looking for the US to outperform the euro zone near term as the US is off to a good start in terms of the earnings season. This could foster inflows into the US and out of the euro zone short term – not least given that the US so far had fared notably better amid the global loss of growth momentum than Europe”.

“Further, the continuous rise in USD hedging costs could imply that such flows are unhedged to a larger extent. Coupled with our call for relative rates to edge in favour of a lower EUR/USD still (though admittedly this has not been a key driver over the past year), very stretched positioning long EUR/USD also makes the cross look increasingly vulnerable on the downside”.

“Meanwhile, political uncertainty has failed to move the cross significantly over the past two months. We are long EUR/USD via options but suggest positioning for possible downside short term”.