- EUR/USD jumps
- As ‘long’ USD positions are cleared
- USD could recover soon says ING
- But a lower terminal Fed rate could be behind the weakness
- In which case, USD weakness has legs
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The Dollar has fallen against the Euro and British Pound, but the move won’t be an enduring one says a foreign exchange strategist we follow.
In fact, Francesco Pesole, FX Strategist at ING, says the Euro’s run of appreciation against the Dollar will be done by the weekend.
The Euro to Dollar exchange rate (EUR/USD) has rallied to its highest level in two months at 1.1462 at the time of writing on Thursday, January 13.
The pair had been rangebound since early December, but a series of events concerning the U.S. Dollar has ensured it has broken out of its recent range to move to the upside:
Above: EUR/USD shown at daily intervals.
- EUR/USD reference rates at publication:
- High street bank rates (indicative band): 1.1064-1.1144
- Payment specialist rates (indicative band): 1.1362-1.1410
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The Dollar slumped and gave a pass higher to the Pound and Euro on January 12 following the release of inflation data on Wednesday that showed the U.S. witnessed its strongest rise in prices since 1982 in December.
But the 7.0% headline figure was anticipated by markets, who might have been looking for an even hotter read.
“A well-telegraphed jump in US inflation to 7% was taken as a ‘sell the fact’ opportunity for FX investors, with a substantial unwinding of dollar longs triggering widespread dollar weakness,” says Pesole.
ING says the technical break higher in EUR/USD likely put some extra pressure on the Dollar in other crosses, but “whether the 1.1500 resistance holds is key for dollar bulls at the moment”.
Positioning was firmly pitted against the Dollar heading into 2022 as the market had piled into a consensus ‘long dollar’ trade through the second half of 2021.
With positioning stacked in anticipation of yet further gains by the Greenback the trade has ultimately become crowded and vulnerable to any setback in the ‘long dollar’ narrative.
“Positioning suggests that long USD is the consensus trade for the beginning of the year. However, consensus trades have historically performed poorly during the first quarter. Against market consensus and positioning, we continue to expect modest USD depreciation over 2022,” says Erick Martinez, FX Strategist at Barclays.
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Once extended positioning is cleared away the path higher arguably becomes easier.
“The dollar might have a more balanced positioning now after a large long-squeeze, which could help keep EUR/USD below 1.1500,” says Pesole.
There are no shortage of foreign…