Long EUR/USD has been one of the most effective G10 fx trades of the year. We have been fortunate to catch the move from early on, as discussed in this January note. As is often the case, the crowd is following the money and chasing the 12% year-to-date momentum expecting trend continuation.
Analysts are starting to point out that buying EUR/USD is becoming an increasingly crowded trade. And it is. However, that doesn’t mean there isn’t more demand in the capital flow pipeline ready to step in and support the high flying pair on any dip.
Unless Mario Draghi unleashes an unequivocally dovish assault on the single market currency today in Jackson Hole, which is unlikely, there isn’t much in the way of EUR/USD trading above 1.20. Given bolstered fiscal coordination sentiment between Germany and France, waning populist Euro skepticism on the back of Trump’s unpopularity in the euro-zone, and political dysfunction abound in the US, it will take a noticeable deterioration in EU macroeconomic data relative to that of the US to meaningfully stem the EUR/USD rise.
Heavy long EUR/USD positioning leaves the pair vulnerable to a sharp pullback once the impressive European trade surplus and business optimism begin to soften. For the time being, 1.20 is our upside target to reassess and dips can be bought until the relative macro picture changes. As I have pointed out, ECB dovishness only reinforces the notion of a central bank behind the curve with yield suppression reversal pressure mounting until the data begin to reinforce the jawboning.