Kit Juckes at Societe Generale highlights that EUR/USD has lost downward momentum after slipping from 1.18 to 1.16, despite risk-off conditions and tumbling sentiment indicators. He links this resilience to a bearish Dollar consensus and to markets still pricing multiple ECB hikes, suggesting rate expectations must shift before EUR/USD trends decisively.

Euro holds despite risk-off backdrop

"Rates and equity markets are in ‘risk-off’ mode, the SG Sentiment Indicator is tumbling and yet, EUR/USD, having slipped from 1.18 to 1.16, has run out of downward momentum!"

"To some extent, this reflects the bearish USD consensus (President Trump wants a weaker dollar and lower rates and isn’t doing anything to make foreign investors relaxed about holding long dollar positions), and to some extent it reflects the fact that while the front end of the US rates curve is now pricing in a decent chance of a Fed hike this year (in which regard, Wednesday’s FOMC Minutes will be interesting) it is still pricing in 3 ECB hikes (and 2 ½ from the bank of England)."

"This still suggests that we need the rates market to move before FX can: If European rate hike expectations are questioned by the market (they look excessive given the economic outlook) the dollar is likely to get a lift (as it would if the FOMC minutes trigger a further rethink of the likely Fed rate path), but even so, any upward trend in the dollar is likely to be slowed by the underlying negative sentiment."

"Currently, the futures market is busy, once again, giving up on long USD positions."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)