EUR/USD: Is upbeat outlook well priced? Positive factors remain valid - MUFG

FXStreet notes that following the FOMC shock this week, all G10 currencies have weakened sharply but EUR selling has been less than most other G10 currencies – the 2.0% drop was the third smallest decline. So the question now is with dollar sentiment more positive will market participants return to running large EUR shorts? In the view of economists at MUFG Bank, reasons to sell the euro are not evident.

“The US and the EU announced a 5yr tariff truce related to the dispute over subsidies to the airline sector. What’s more, the GDP slowdown in 2018-19 was notable - the annual rate slowed from 3.1% in Q4 2017 to 1.2% in Q4 2018. A period of stronger growth lies ahead now. Yes, this is expected and will be global but it will limit the appetite for EUR selling.” 

“The signs of a pick-up in vaccinations in April helped fuel EUR41.6 bn worth of equity buying, the largest since December last year. After a prolonged period of underperformance, we see scope for equities in Europe to outperform. Corporate earnings positive surprises relative to negative hit a record earlier this year. Bond inflows remained muted with modest selling worth EUR1.4 bn. Over time as EU Recovery Fund debt expands and becomes more liquid, foreign investor appetite is likely to pick up given the approx. 25bp pick-up over Bunds.” 

“We believe the outlook in Europe is not consistent with a renewed large build-up of EUR short positions in the market with portfolio flows also set to support EUR.”