Euro Short Covering Underway and Long-term Outlook
After the much discussed FOMC meeting, one can witness, as it was expected, a massive EURUSD rally, the biggest single-day rally seen in over the past three years.
At the end of the last week, EURUSD was ranked at +3.00% at $1.0814, while on Monday it had set a fresh low at $1.0458. The rapid build in short positioning ahead of the FOMC meeting brought the market in a similar position seen at the beginning of February, right before EURUSD developed a consolidation that lasted a month. At the present time, with the Fed having the first rate hiked pushed towards either October or December, the weak data coming from outside the United States provides good conditions for the US Dollar position to remain untouched.
Even if the short EURUSD position remains so, the Euro currency, if considered separately, is still weak. Bound prices across Euro region continue to rise, as German yields for example, which are negative out to 7 years now. The German bund yield was positioned, at the closing of the week at -0.11%, while inflation expectations rise. Under these circumstances, Euro-Zone based investors will find themselves soon in the need of seeking yield outside the region, which will lead to exchanging Euro for foreign currencies in order to invest in higher yielding assets.
In the weeks to come, EURUSD is expected not to provide opportunity to see weakness in the Euro. Allowing more time for the markets to align to the most recent trends imposed by the Fed and the US economy to close the early Q1-data may become the past ascending path for EURUSD.