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Nov 23 - 06:55 AM

EUR/USD - COMMENT EUR/USD Traders Should Consider The Carry Trade

By Jeremy Boulton  —  Nov 23 - 04:55 AM

Those prepared to short EUR/USD can receive a substantial interest rate return that is not seen changing much in the year ahead, and unlike most carry trades this one can prosper in both positive and negative environments.

In risk averse times the dollar usually prospers, while positive periods support investment in currencies with higher yields.
The current 2.5% interest rate divide between euro zone and United States is expected to hold around 2% throughout 2023.

Following a notable correction of the EUR/USD downtrend that has spurred many traders to gamble on a bigger rise, the risk of adverse FX movement has fallen.
The downtrend is intact and with traders heavily long at the base of the slide, the certainty that they will sell, either stems the pair's potential to rise, or fuel a deeper decline.

While volatility is still high, it has dropped with one-month vol around 11.4 from 14 in October and stocks have soared with gains for DAX and DJI approaching 20% within 40 days.
Quieter markets influenced by positive trading behaviour support carry trades.

At the end of the last U.S. tightening cycle in 2018, EUR/USD traders established a $15 billion carry trade that endured for two years with the pair dropping from 1.25 to 1.1000 before the COVID-19 pandemic spurred big changes.

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Source:
Refinitiv IFR Research/Market Commentary

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