Strategists at Citibank have said they are looking to sell the EUR to USD exchange rate in anticipation of a bout of US dollar strength. Writing to clients, Citi say:
Fresh from the US April jobs report (NFP) released Friday that neither adds nor detracts from the case for a June rate hike, USD continues higher on Monday despite US yields falling modestly.
Disappointing Chinese trade data over the weekend may be adding to a risk aversion bias and therefore supporting USD especially against the commodity bloc (AUD, NZD and Asia EM in particular), but the limited post NFP fallout following a disappointing headline jobs headline also serves as a reminder of how underpriced market Fed tightening expectations remain, attaching just a 50% probability of one hike this year.
Contrast this with Fed speak post the NFP release (Dudley, Evans and Kashkari) forthrightly stating that June is not off the table and that it is a reasonable assumption to expect 2 rate hikes this year.
Looking at the charts, our CitiFX Technicals team expects the USD recovery to be more sustained given the underpricing of the Fed rates outlook but also given the risks faced elsewhere that is likely to see USD as the ‘safe haven’ of choice over the next 3 months.
Such risks include:
- The UK’s EU referendum on June 23rd and where UK economic data is now starting to show the strains from uncertainty about the vote.
- Greece is starting to gain some focus with policymakers and the IMF at odds over whether Greece can achieve its agreed fiscal targets.
- Spain, where markets seem to be underestimating the risk of the June 26th elections scheduled adjacent to the UK referendum, the UK referendum itself where a vote to leave will likely also damage euro zone sentiment.
- Austria, the second round of Austrian elections on 22 May where the victory of the far-right candidate in the first round already reflects widespread discontent with the status quo.
CitiFX’s technical team has gone short EURUSD at 1.1383 with a minimum target of 1.0820 and a likely extension back towards the tren]d lows at 1.0458-1.0523 given a range of upcoming event risks for the euro zone in the next 2 months (please refer Macro Overview).