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Feb 29 - 09:55 AM

RBC: Revised EUR/USD Outlook Amid Prevailing Market Dynamics

By eFXdata  —  Feb 29 - 08:30 AM

Synopsis:

RBC provides a 1-3 month outlook on the EUR/USD pair, noting its recent fluctuation around the 1.0827 level, which represents the average spot rate over the past 12 months. This observation underscores the challenges investors face in generating enthusiasm for G10 currencies, including the euro, which has seen a bias towards short positions, especially on crosses. RBC acknowledges the well-priced bearish sentiment towards the euro but also highlights potential upside surprises given current economic conditions in Europe.

Key Points:

  • Current Market Positioning: The aggregate positioning across G10 currencies is at multi-year lows, with a notable bias for short EUR positions. This reflects the consensus view of the Euro area's heightened recession risk.

  • Downside Risks for the Euro: Potential factors contributing to further EUR depreciation include weaker Eurozone data, European banking troubles, escalated conflicts in the Middle East, and potential trade war rhetoric from Trump should he gain in polls.

  • Potential for Upside Surprises: RBC's European economists point out that decreasing inflation, combined with historically low unemployment rates, could lead to rising real incomes and improved domestic demand in Europe. A ceasefire in conflict zones could also reduce the 'war premium' on the EUR.

  • Revised EUR/USD Trough Expectation: With the Federal Reserve moving towards rate cuts and the European Central Bank (ECB) expected to follow at a slower pace, RBC has adjusted its expected trough for EUR/USD to 1.06 in Q2.

Conclusion:

While the EUR/USD pair's bearish sentiment appears to be largely factored into its current pricing, RBC suggests that the potential for upside surprises should not be dismissed. The firm revises its near-term outlook for the EUR/USD pair, anticipating a trough of 1.06 in the second quarter, amid a backdrop of evolving economic indicators and geopolitical developments.

Source:
RBC Research/Market Commentary

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