Credit Suisse discusses EUR/USD outlook and maintains its view for staying sidelined around current levels, expecting the pair's tactical bounce to be met with sellers into 1.18-1.20 zone.
It seems reasonable to us that EUR FX volatility has fallen as much as it has, especially in tenors up to 3m, and that EUR shorts have been squared up. We accept therefore that it may be a slow burn before Italy risk leads to a new EUR leg lower, and we would not add to short EUR positions at these levels or time.
The question then is how much can EUR rally from here with Italy risk still on the table within a 4-month window, even if the first two of those might be quiet, and what levels might make sense in terms of adding to shorts? We suspect rallies into a 1.18-1.20 will likely meet sellers in EURUSD, with the latter level likely to be very stiff resistance even if all goes well given it is around the 200-day moving average, not to mention a key psychological level," CS argues.