Betting on Stronger Euro May Have a Limited Shelf Life

(Bloomberg) -- Betting on a stronger euro may have a limited shelf life as its long term prospects remain bearish.

Any move higher in the common currency may meet selling pressure as soft euro-zone data and the ongoing rift between Italy and the European Commission cancel out bets on fewer Federal Reserve interest-rate hikes. Bears could take advantage of a rally toward $1.15 resistance to add to existing positions, while bulls may need to cut exposure if the currency slips toward $1.13.

Trade-positive headlines out of the highly anticipated meeting between U.S. President Donald Trump and Chinese leader Xi Jinping at the Group of 20 summit in Argentina this week may weigh on risk-off trades and force another round of a euro short squeeze. The Fed minutes of its Nov. 7-8 meeting and any dovish signs could further boost bets on a slower pace of tightening than currently priced in.

Still, a less hawkish Fed is only one side of the coin. The account of the European Central Bank’s latest meeting on Thursday showed policy makers expressed concerns over growth, and rightly so as data Friday revealed the euro-area manufacturing grew at the slowest pace in almost four years in November. The Governing Council is waiting for its updated projections due next month before re-assessing its tightening bias and the region’s advanced inflation reading for November may gather more interest than usual.

The euro’s volatility skew suggests investors remain bearish on the currency’s long-term prospects as euroskeptics gain traction once more, boosted by Italian turmoil and as the possibility of a populist rise in the EU parliament’s May elections increases. The euro’s gains may prove short-lived again.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

What to Watch:

• G-20 Leaders’ Summit held in Buenos Aires on Friday, Nov. 30; Trump and Xi have tentatively agreed to meet and discuss trade issues on the sidelines of the meetings
• European Union leaders gather for a special summit to endorse the Brexit divorce deal on Sunday, Nov. 25
• Panel at the Clearing House conference in New York on Nov. 27 include Fed presidents Esther George (Kansas), Raphael Bostic (Atlanta) and Charles Evans (Chicago); Fed Vice Chairman Richard Clarida is the keynote speaker
  • Policy makers’ speeches also include Fed Chairman Jerome Powell
  • Fed releases minutes of Nov. 7-8 meeting
• Economic releases include U.S. PCE deflator, growth and personal spending; see data calendar
• The Bank of England publishes its Financial Stability Report on Wednesday, Nov. 28 and its independent assessment of Brexit’s impact on the financial system and broader U.K. economy the following day

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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