Sell EUR/USD say Barclays Strategists

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The Euro has endured sustained selling pressure through November, and it is not yet time to give up on the trade suggest strategists at Barclays.

A combination of two overarching factors are set to weigh on the EUR/USD pair for the remainder of the week.

Foreign exchange strategists at Barclays advocate betting on further declines in the EUR/USD exchange rate.

The call is based on two reasons, the first of which is due to a widening in the difference between US and EU 2-year bond yields, the second is political.

Higher US yields are attracting investors who want a greater return and this is increasing flows across to the US, helping the Dollar continue to appreciate.

The next factor weighing on the Euro side of the pair disproportionately is the increased political risk that a Brexit-style political revolution will sweep the Eurozone in 2017, given the high number of elections to be held.

In a note to clients strategists say:

“For the EUR, we think Trump’s victory is another example of the Politics of Rage, to which the EA is particularly vulnerable.

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“As such, we think EUR political risk premium has increased following with EURUSD implied volatility increasing by a larger amount than GBPUSD implied volatility, for example.

“This risk premium is likely to grow over the coming year amid a very busy European political calendar,” said Barclays in a note on the pair.

Both these factors are likely to keep pressure on EUR/USD in the short-term, according to Barclays.

Meanwhile, fundamental analysts at the bank have written to clients this week telling them to expect EUR/USD to fall below parity in 2017.

For a more detailed insight please see here.

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Barclays is not the only institutional strategist anticipating further declines in Euro-Dollar.

This week we have heard MUFG suggesting the pair will fall to parity, something echoed by long-time Euro bears Deutsche Bank.

A word of caution though.

The recent sell-off is looking a little over-extended at present with the daily RSI reading at 20.5 - note that anything below 30 is considered an indication of a product being oversold.

We would therefore expect either a rebound or some sideways action in order to get some equilibrium back into the market.