EUR/USD rallied sharply on Tuesday as upbeat risk sentiment drove investor flows into riskier plays, but the rise might be short-lived as inflation, positioning, yield differentials and election risks could still lead to uncertainty.
EUR/USD's rally, likely aided by short covering, stalled near the daily cloud base, and further gains might be limited.
Euro zone inflation expectations are tumbling.
The 5-year/5-year inflation linked swaps EUIL5YF5Y=R broke October's monthly low, hitting a 4-month low, which could boost expectations for ECB accommodation in December.
Positioning remains a downside risk.
CFTC data show net-long euro positions remain elevated nL1N2HO1NEdespite recent reductions.
That positioning could haunt EUR/USD if a rally does not emerge and longs cut positions.
The dollar's yield advantage presents a risk to EUR/USD longs. The trend in German-U.S.
spreads indicates that advantage is increasing.
The U.S. election could present uncertainty if results are contested or delayed, which could drive investors into safer plays.
Even if election results emerge quickly, EUR/USD could struggle to rally, making a break below September's low possible.
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