Euro: Recovery does not justify stronger EUR – BNY

FXStreet Insights Team FXStreet

BNY’s Geoff Yu argues that while Eurozone growth and inflation risks are real, being long the Euro (EUR) is not the best way to express this view. Yu highlights strong industrial data and fiscal support that favor European assets, but stresses weak demand, European Central Bank (ECB) policy-error risk and rich EUR valuation. It recommends EUR-funded carry trades instead.

European recovery but weaker euro

"Bottom line, Europe’s recovery is real, and inflation risk is real. Long EUR is the wrong expression for these views. Industrial and fiscal support favor European assets, while weak demand, policy-error risk and rich valuation weigh on the currency."

"The recovery is not yet broad based. German services fell to 48.5, confidence weakened and output-price inflation eased for a third month. Across Europe, inventories, defense and data-center investment are supporting industry, but the demand and core inflation impulse remains insufficient to justify sustained EUR appreciation."

"Outright EUR positioning is strong now, while cross-border hedges sit nearly 60% below their one-year average. Dollar reductions following the July FOMC have left investors materially underhedged on Eurozone assets. With EUR rich and its rate differential against USD still negative as the Fed steps up tightening, currency hedging should rise even if allocations to Europe continue."

"EUR remains overvalued. It’s nearly 2% above its one-year BIS REER average; the currency is expensive in real terms but relatively cheap to borrow."

"Using EUR as a funder is not a negative view on the Eurozone. European equities can outperform alongside a weaker currency, while unhedged allocations face a drag if REER normalizes. EUR-funded carry benefits from the same adjustment."

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

Author

FXStreet Insights Team

FXStreet

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.

AUD/USD hangs close to monthly lows, still defends 0.7100 ahead of Fed decision

AUD/USD retains its negative bias for the third straight day, defending 0.7100 while trading close to a monthly low in Wednesday's Asian session on Wednesday. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears continue to push US bond yields to a multi-year high. Furthermore, escalating Middle East tensions benefit the safe-haven buck and weigh on the risk-sensitive Aussie.

USD/JPY holds firm above 155.00, awaits Fed policy announcements

USD/JPY climbs to a fresh one-week high above 155.00 in the Asian session on Wednesday amid a bullish US Dollar. Oil-driven inflation fears, along with the anticipated Fed rate hike, continue to support surging US bond yields. Moreover, rising US-Iran tensions underpin the USD's reserve currency status. The pair, however, remains below the mid-155.00s as bulls seem hesitant ahead of the Fed decision later today and the BoJ meeting, starting on Thursday.

Gold traders seem noncommittal below $4,350; eyes Fed rate decision

Gold clings to modest intraday gains through the first half of the European session, albeit it lacks follow-through buying and remains below $4,350. The US Dollar eases from a two-week high amid some profit-taking, offering support to the commodity. Traders, however, seem hesitant to place aggressive directional bets and opt to wait on the sidelines heading into the key central bank event risk.

Cardano's bearish breakout warns of a 15% downside risk

Cardano (ADA) hovers around $0.1900 at press time on Wednesday after a 6% decline the previous day, breaking below a crucial support level. Declining on-chain activity across the Cardano ecosystem, with reduced transaction count and Real Economic Value (REV), suggests waning user demand.

Fed decision in focus

Starting with the most important, the Fed decision. Heading into the event, data showed a rather punchy US August jobs report, which, you will likely recall, triggered a hawkish Fed rate repricing in rates markets. However, the recent US August CPI print mattered more.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.