Euro: Lower energy costs ease headwinds – MUFG

MUFG’s Lee Hardman highlights a relief rally in the Euro (EUR) as falling energy prices reduce external headwinds for Euro area economies. Leveraged funds hold heavy short EUR positions, leaving the currency vulnerable to a short squeeze if energy concerns fade. Narrowing French-German yield spreads and reduced French fiscal risk also support sentiment.

Euro supported by easing risks

"The euro is staging a relief rally encouraged by lower energy prices, which if sustained would help ease headwinds for euro area economies."

"Short euro positions have increased sharply since mid-September and have hit their highest level since the start of the COVID shock in early 2020."

"It leaves the euro vulnerable to a short squeeze in the near-term if the investor concerns over the scale of the energy shock continue to fade."

"At the same time, the yield spread between 10-year French and German government bonds has narrowed alongside lower energy prices."

"The price action highlights that further progress towards a US-Iran deal would help make it easier for French politicians to restore investor confidence."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)