|

Euro: Positioning-driven recovery prospects – TD Securities

TD Securities’ Macro Research team, led by Jayati Bharadwaj with contributions from Howard Du and Linda Cheng, argues that recent EUR/USD weakness has been driven by high Oil and diesel prices and French OAT concerns. They see sentiment stabilizing, expect near-term Euro pressure through October, but are fading the EUR/USD selloff via a 3‑month risk reversal expressing a bearish Dollar year-end view.

Euro pressured yet sentiment stabilizing

"We expect EUR to remain under near-term pressure as markets navigate key October dates and the Moody’s ratings review. While renewed fiscal concerns have weighed on EUR, the reaction remains relatively tame compared with the last episode of comparable OAT-Bunds widening."

"We therefore see scope for near-term EUR underperformance, but not a derailment of the broader trajectory beyond October, particularly if France can keep the 2027 deficit in the low-5% range and stress remains concentrated in OATs rather than becoming a systemic euro-area concern."

"Our trend-following framework suggests the USD rally was becoming stretched vs EUR, GBP, CAD, SEK and MXN. G10 FX positioning is also now broadly short vs the USD except for JPY."

"We prefer to fade the EUR/USD selloff than to chase it back to the pre-Liberation Day range. We entered a long EUR/USD trade via a 1.16/1.11 zero-cost risk reversal."

"We fade the EUR/USD selloff via risk reversal. We entered a 3m EUR/USD risk reversal (buy 1.1610-strike call funded by short 1.11-strike put) last week to express our bearish USD year-end forecast at attractive spot entry level."

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

Author

FXStreet Insights Team

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

More from FXStreet Insights Team
Share:

Editor's Picks

AUD/USD holds above 0.6950 as bullish USD caps gains

AUD/USD edges lower during the Asian session on Tuesday, stalling a two-day recovery move from a two-month low, touched last week. An extended rout in the fixed income market keeps US bond yields elevated near multi-year highs. This, along with geopolitical uncertainties, helps the US Dollar retain its bullish tone despite receding October Fed hike bets. However, expectations for another RBA rate hike this month could act as a tailwind for the Aussie.

USD/JPY rises back above 158.00 despite hawkish BoJ outlook

USD/JPY rises back above 158.00 in the early European morning on Tuesday. The pair strengthens as the Japanese Yen fails to find any inspiration from hawkish BoJ expectations and looming intervention risks. Meanwhile, geopolitical uncertainty and elevated US bond yields keep the US Dollar near its YTD high despite receding October Fed hike bets. This, in turn, helps the pair stay supported.

Gold rebounds from two-month lows as US Dollar, Treasury yields retreat

Gold (XAU/USD) rebounds on Tuesday as a pullback in US Treasury yields weighs on the US Dollar (USD), helping the metal recover after falling to a two-month low of $4,104 during Asian trading hours. At the time of writing, XAU/USD trades around $4,173, up 0.82% on the day.

Crypto Today: Bitcoin, Ethereum, XRP bulls battle to restart uptrend amid ETF outflows

Bitcoin upholds a robust bullish outlook, trading at $85,837 on Tuesday as sellers push to regain control over the trend. Altcoins, meanwhile, reflect Bitcoin’s ranging action, with Ethereum trading sideways above $2,700 and Ripple hovering around the pivotal $1.50 level.

Japanese Yen nears 158.00: Two analysts agree it's bullish, and disagree on how far the breakout goes

The JPY is drifting near 158.00 against the USD ahead of a busy week of Japanese data and a still-unclear BoJ timetable. The two most recent FXStreet analyses agree on the direction, but they disagree on the target and the mechanism.

Eurozone inflation just hit 3.8%, its highest in three years. This chart shows why the ECB can’t simply hike its way out

The ECB would normally have a relatively straightforward answer to inflation running almost twice its target: raise interest rates. But these are not normal circumstances. This time, the bond market is already doing part of the tightening for it, leaving the ECB facing an increasingly difficult dilemma.