Barclays FX Analysts Forecast a US Dollar Comeback
Is it time to back the US dollar? Yes suggest Barclays who see current levels in the Euro Dollar exchange rate as a good point to position ahead of declines. (See how the top traders on the world's largest social trading network are positioned).
The euro is firm following the release of Eurozone Consumer Confidence data which edged up to -17.4 in July, from -18.8 in June. This result is in line with market consensus.
Eurozone Business Climate rose to -0.53 in July, from -0.67 in June, above expectations of a increase to -0.55.
US dollar forecasted to gain against the Euro
Barclays, in a morning briefing, tell clients they believe the US dollar is due a comeback and clients should position accordingly:
"Divergent economic prospects, the outlook for relative monetary policy, and cleaner market positioning in EUR/USD provide a good entry point for shorting the cross, in our view.
"A reiteration of ECB forward guidance language, limited scope for a more dovish Fed than current market expectations, and indications of resilient private sector activity (eg, payrolls this week) are likely to act as the trigger for a stronger USD.
According to Jose Wynne at Barclays Eurozone economic performance is unlikely to provide the necessary support going forward:
"Private sector spending looks stronger and more able to deliver sustained progress in the US than in Europe. PMI numbers in Germany and France are likely to prove more relieving than revealing of the early stages of a solid recovery. Indeed, subdued euro area new orders and hiring intentions point to a sluggish recovery later this year.
"On the flip side, consumer confidence and investment intentions in the US remain robust, indicating that a continuation of the business cycle expansion is likely."
In addition to the above, the tightening in liquidity in the euro area continues, leading to spikes in the EONIA fixing and supporting the EUR suggest Barclays.
Wynne says:
"We believe that these spikes in euro area interest rates are temporary in a world where the ECB controls the front end of yield curve using its forward guidance.
"With euro area financial conditions remaining fairly tight and fragmentation persisting (with private lending in the periphery dropping more than expected, according to last week’s data), it is unlikely that the ECB will back down from the guidance that it issued at its July meeting. We believe the first step is forward guidance and, contingent on data, LTROs injections may follow eventually.
"Indeed, our rates strategists recommended going long 1y1y forward Eonia forward and see any sell-off as an opportunity to receive rates. In FX, this implies that EUR/USD strength on the back of higher euro area rates should be sold."
The USD had generally strengthened in the Asian trading session today, helped by a smaller-than-expected drop in US pending home sales in June.
With the EUR is trading near the top of its recent range, which implies a further tightening in financial conditions, Wynne has suggested clients re-initiate their short positions on the euro dollar exchange rate.