Has the EUR rallied too far, too fast, and is a reversal now imminent?
To answer this we look at six different elements of FX positioning and sentiment across three different types of investment horizons and styles.
Fast moving - speculative investors:
- FX positioning: long EUR positions have increased but this in itself does not mean a pullback is imminent
- FX options: relative call-put prices and call strike levels do not yet suggest the market believes in a much stronger EUR
Medium paced - portfolio managers:
- Portfolio flows: no investment pick-up into Europe yet, after years of outflows
- Equity market conviction: funds remain underweight on European equities relative to history
Slower moving - reserves holdings:
- Reserves managers: EUR holdings are at multi-year lows, and not rising yet
- Consensus forecasts: the sell-side does not appear to have become more bullish on the EUR yet; if anything, consensus is showing a lack of conviction
The fast money has become more positive on EUR but not to such a degree that it implies a pull-back is imminent. Meanwhile, the slower moving investors have shown little sign of turning more bullish. If they start to follow the speculators' lead, then EUR-USD could move significantly higher. We maintain a forecast of 1.20 for EURUSD by year-end.