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Mar 04 - 06:55 PM

Barclays: 3 Reasons why we Expect a Reversal in Recent USD Correction

By eFXdata  —  Mar 04 - 03:00 PM

Synopsis:

Barclays predicts an unwinding of the recent correction in the US dollar's appreciation trend, citing three primary reasons. Despite a brief pullback in the dollar's strength, factors such as sentiment indicators, market re-pricing of Federal Reserve expectations, and the relative economic performance of the US versus the Euro Area are expected to contribute to a resumption of the dollar's upward momentum.

Key Points:

  • USD Sentiment Indicator: The indicator remains in negative territory, with the recent drop primarily driven by a reduction in positioning rather than a significant change in news sentiment. This positioning reduction is partly attributed to month-end USD selling, which is expected to reverse in early March, bolstering the USD.

  • Fed and ECB Expectations: The re-pricing of expectations for the Federal Reserve, coupled with similar adjustments for the European Central Bank, underscores a potential divergence in policy paths. Despite slight improvements in Euro Area PMIs, they lag behind US indicators, supporting the prospect of divergent rate expectations.

  • Relative Economic Performance: The fundamental economic dynamics between the US and the Euro Area suggest a bearish outlook for EUR/USD, with the pair expected to trade towards the lower end of the 1.00-1.10 range. Additionally, negative economic impulses from China are likely to further pressure the Euro Area and EUR/USD, while upcoming US labor market data is anticipated to highlight the ongoing tightness, countering expectations of an early dovish shift by the Fed.

Conclusion:

Barclays concludes that the recent correction in the USD's appreciation trend is likely to unwind, with a bearish outlook for EUR/USD in the near term. The combination of technical factors related to USD sentiment, anticipated policy divergence between the Fed and the ECB, and the relative economic outlooks for the US and Euro Area all contribute to this view. The upcoming US labor market report, in particular, is expected to serve as a catalyst for renewed USD strength, offering an opportune moment for investors to consider short positions in EUR/USD.

Source:
Barclays Research/Market Commentary

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