"Big trade of this month has been long equities short dollar," says Monex Europe

November 29, 2023 - Written by David Woodsmith

STORY LINK "Big trade of this month has been long equities short dollar," says Monex Europe

EUR/USD Exchange Rate Advances to Fresh 3-Month Highs, Traders Determined Test 1.10

The dollar lost ground into Tuesday’s New York open with the Euro to Dollar (GBP/USD) exchange rate advancing to fresh 3-month highs just below 1.0990 before a retreat to 1.0970.

Confidence in a soft US landing remains high which has maintained downward pressure on the dollar.

Markets will inevitably want to challenge the 1.10 level where resistance is likely to be tough.

US consumer confidence was reported at 102.0 for November and above consensus forecasts of 101.0 while the October reading was revised sharply lower to 99.1 from the previous reading of 102.6.

The expectations component recovered significantly, but remained below the level which traditionally signals recession within 12 months.

Treasuries were little changed after the data with the 10-year yield around 4.38%.

The US economic debate will inevitably remain a key element in the short term.

Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank expects further dollar weakness; “We expect a period of economic weakness in the US medium-term. To an extent that will likely deserve the label ‘recession’. I am therefore principally pessimistic about the US data. And even secondary data could support a USD-negative view.”

Barclays considers that expectations of lower US rates are overdone; “USD downside will eventually be capped by still-elevated US rates. We think that any unwind of the USD due to a pull-back in Fed tightening expectations is overdone; markets are pricing in close to 90bp of cuts next year, but we now expect the Fed to stay on hold through most of the year and cut only in December 2024. A more hawkish US rates repricing will be USD supportive into Q1 2024.”

The bank added; “In all, our new forecasts envisage EURUSD hovering around 1.05 into a period of peak US exceptionalism in Q1, before a slow grind towards 1.10 commences into end-2024.”

According to Credit Agricole; “While positive data surprises and hawkish Fedspeak could fuel intraday FX volatility, we doubt that there will be any sustained support for the USD as FX investors await the release of the US Core PCE data on Thursday and the two speeches by Fed Chair Jerome Powell on Friday.”

It added that it expects technical factors will provide further near-term Euro support; “EUR/USD was already somewhat overvalued compared to our latest FAST FX estimate which stood below 1.08 based on last week’s closes. Nevertheless, a correction may not take place just yet, as our month-end rebalancing model points to EUR buying/USD selling flows for the next few days.”

ING sees little immediate value in selling the dollar; “Month-end flows may get in the mix and delay a dollar recovery, but we remain of the view that it is too early to chase the dollar bear trend. There is still some resilience in US data into year-end that can prop up the high-yielding dollar.”

The bank added; We are not convinced the pair has enough backing on the rates side to trade sustainably above 1.10 and favour instead a correction below 1.0900 in the coming days.

Rabobank is still cautious over dollar selling; “While we have revised up our EUR/USD forecasts and now see EUR/USD at 1.09 on a 12-month view rather than 1.05, this is well below most model based estimates for fair value for EUR/USD.”

Simon Harvey, head of FX analysis at Monex Europe commented; "Markets have been wanting to get ahead of the next big theme - monetary easing, better conditions for risk assets and a weaker dollar."

He added; "Shorter term we’re keeping an eye on the general sentiment in markets - the big trade of this month has been long equities short dollar - and then these psychological levels - the euro has bumping against $1.0960 and each of its runs at that in the past week has been thwarted."

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TAGS: Euro Dollar Forecasts