Time is Right To Sell EUR/USD say Barclays Strategists

The Jackson Hole Symposium and forthcoming central bank meetings could yield a change of narrative that favours the USD, while the EUR/USD pair is at risk of exhaustion after solid gains during the year to date.

The time has come to consider selling the euro short against the US dollar, according to foreign exchange strategists at Barclays, who see the currency pair as being among the most vulnerable to a possible change of narratives among central bankers.

This is in part due to the Euro having overshot the level where its cyclical fundamentals dictate that it should trade, at a time when US dollar weakness has taken the greenback to the lower end of its justifiable range, according to Barclays’ Marvin Barth.

“Until now a catalyst for a reversal has been missing,” says Barth, adding;“We believe that the risks around Jackson Hole speeches and the September ECB and Fed meetings are skewed towards a change in narrative that favours the USD, particularly at the expense of the EUR.”

The euro was trading 0.01% higher against the dollar on Friday, quoted at 1.1798, although the currency pair has gained more than 12% during the year to date.

Source: Netdania

Recent price action has seen the common currency changing hands around the level of its long term average and at a 1% premium to its fair value dictated by the Barclays BEER model (Behavioural Equilibrium Exchange Rate).

“A one-off shift higher in the EUR’s trading range is appropriate due to the reduction in perceived political and deflation risks, the improvement in the economy, and higher returns to capital,” Barth wrote.

Factors driving the gains seen by the euro in 2017 have been two pronged.

The dissipation of “break-up risk”, otherwise termed geopolitical risk, has been a noteworthy force in the wake of the Dutch and French elections that saw challengers to established order routed in a convincing manner.

But political dysfunction in Washington has also emerged as a key influence on the price of the euro, with strategists at ING in the Netherlands noting on Friday that politics in the U.K. and the U.S. have left the eurozone looking like a beacon of relative political stability.

“But the euro area still is a long way from full resource utilisation, inflation near the ECB’s target of close to but below 2%, and positive front-end interest rates,” Barth explained.

Central bank experiences of European politics in recent years could also mean that the euro doesn’t get another shot at usurping the position of the US dollar as the global reserve asset of choice.

In addition, lagging indicators of market positioning, such as the CFTC commitments of traders reports, have shown the overwhelming majority of speculative investors being long the EUR/USD pair in recent times, along with so-called real money investors.

“Positioning indicators are somewhat mixed, but do suggest risks to a EURUSD reversal,” Barth says.

Barclays has recommended to selling EUR/USD around Friday’s level, at 1.1797, and targeting a move to 1.1203.