Sell the EUR/USD Rate as Brexit Hedge Suggest Barclays

The EUR to USD conversion is forecast to remain under pressure for the remainder of 2016 by analysts at Barclays and will prove to be a cheaper hedge against Brexit risks than betting against the pound it is argued.

Strategists at Barclays have suggested that the EUR to USD conversion has further to fall and have suggested the pair is a cleaner and cheaper bet on Brexit than any GBP-related pairs.

Strategists recommend the EUR/USD as a play on Brexit as recent market focus on the EU referendum has meant that GBP downside options have become very expensive.

Barclays continue to argue that the referendum is at least as big a risk to EU and Eurozone stability as it is to the UK economy.

As a result Barclays recommend owning EURUSD downside as a cheaper proxy to hedge the EU referendum risk.

“An indicative trade would be selling a 1m 1.06 EURUSD put to finance the purchase of a 4m 1.06 EURUSD put for a 1% premium. Given our Q2 2016 forecast of 1.03, the payoff of this trade, net the upfront cost, would be close to two-to-one, with breakeven level of approximately 1.05,” says strategist Hamish Pepper.

Barclays’ technical bearish view for EURUSD was encouraged by the break below support in the 1.1060 area.

Concerning the outlook, “a weekly close below the 1.1020, 52-week average would point lower toward initial targets in the 1.0850 area and then the 1.0710 year-to-date lows,” says Pepper.

Barclays would become more bearish following a break below 1.0710.

“Our greater targets are toward 1.0460 and then the 1.0215 area,” says Pepper.

1.08 Under Pressure

The EUR-USD remains under pressure from a technical perspective and the support at 1.0850 (61.8% retracement level) is at risk.

"Given the intact sell signals generated by the MACD and DMI on the daily chart, risks are expected to predominate," says Ralf Umlauf at DNB Bank in Frankfurt.

Below the above-stated level, Umlauf sees the potential for declines through to the next supports at 1.0810 and 1.0777.

In addition, a robust ADP reading should be a tailwind for the US dollar. DNB's favoured trading range lies between 1.0777 and 1.0970.

Technicals Indicate 1.05 as 3 Month Target

Technical strategist Stephanie Aymes at Societe Generale has meanwhile told clients recent price action invites declines towards the 1.05 area.

"After a sharp rebound, EUR/USD faced stiff resistance at upper limit of a daily channel. With weekly indicator close to resistance, graphical levels at 1.1440/60 will remain key hurdle," says Aymes.

It is breaching the channel support and test of early February low at 1.08 looks likely suggests the Soc Gen analyst. This will confirm if a revisit of 1.0570/1.05 takes shape.

CitiFX: Trading Like it Did Back in October

Flows analysis from Citigroup, the world's largest FX dealer, reports investors to have ramped up EUR selling last week.

Indeed, CitiFX’s Quant team sees more EUR selling and USD buying to come, while technicals suggest lower levels ahead:

"EURUSD has sustained the break below levels in the 1.1050-60 area which was the previous breakout level on the way up at the beginning of Feb and also where the 200-day MA comes in. This price action is similar to that in Oct’15, suggesting lower levels ahead."

Eurozone Inflation Heaps Further Pressure on the Euro

The euro has started March on a soft footing owing to news that Eurozone inflation entered negative territory over the course of the previous month.

We suspected inflation would be underwhelming having observed German CPI come in below-par last week.

However, the slump in the Feb 29 numbers were worse than expected as annual inflation read at -0.2% for February, analysts had forecast a reading of 0.1%.

"The outturn is the weakest for a year and reflects broad-based declines in core inflation, as well as in food and energy," says a note from Lloyds Bank in response to the data, "core inflation fell unexpectedly sharply to 0.7%y/y from 1.0%y/y, the lowest since April, reflecting declines in both the services and core goods components."

The data will have potentially important implications for the upcoming ECB monetary policy meeting due on the 10th of March.

"Of particular concern is the fall in the underlying core measure of inflation, while market-based measures of inflation expectations have continued to drift lower in spite of more recent signs of stabilisation in oil prices," say Lloyds.

Timo del Carpio, European Economist at RBC Capital agrees and says this drop off in the core reading is something the ECB's decision makers cannot ignore:

"From the ECB’s perspective, the downward slide this month is unlikely to be a major source of surprise, given that officials have already adopted a far more conservative judgement on the inflationary outlook.

"Still, the pronounced decline in the ‘core’ measure this month will likely undermine the case of those on the Governing Council who are still holding out for more information. Against this backdrop, a ‘wait-and-see’ approach simply does not appear to be a viable policy option at this stage."

Markets are pricing in at least a 10bps cut in the deposit rate to -0.4%, while a further expansion of QE, including a possible increase in the current €60bn a month pace of asset purchases, is being considered by the ECB.