EUR/USD extended its retreat from recent highs on Monday as extreme positioning and overbought conditions encouraged profit-taking, putting the correction on the verge of accelerating, though it is unlikely to be severe nL2N2F20Y3.
Net-long euro positions reached an all-time high last week nL2N2F22AO, while net-short dollar positions hit their highest since August 2011 nL2N2F22DH.
Profit-taking on those positions and the lack of a new catalyst to push the dollar lower or euro higher drove EUR/USD down below the July 28 daily low and near the 10-day moving average, and a close below should accelerate the correction.
Risks still favor EUR/USD gains, however, leaving longs to consider where to position for the long-term rally's resumption.
Treasury yields, though buoyant today, remain near trend lows while fed funds futures are pricing in slightly negative rates in June 2021 FFM1.
Euro zone inflation expectations and EUR/USD options imply upside EUR/USD risks.
The bull trend in Euro zone 5-year/5-year inflation linked swaps EUIL5YF5Y=R is intact, threatening key resistance.
EUR/USD risk reversals EUR1MRR=FN show vol premiums for calls still exceed those for puts.
EUR/USD might test 1.1570/1.1600 and possibly 1.1505/15 but a deeper correction seems unlikely.
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