BofA: Staying cautious on EUR-G10 FX, favor EUR/JPY and EUR/CAD downside

Bank of America maintains a cautious stance on EUR against G10 currencies in the near term due to trade uncertainty, weakened risk sentiment, and relative monetary policy dynamics, particularly following strong US economic data. They see opportunities in EUR/JPY and EUR/CAD downside trades.

Key Points:

1. Drivers of EUR Caution:

   • Trade Uncertainty:

     • Worsened risk sentiment and uncertainty around global trade policies continue to weigh on EUR, particularly against “high-beta” G10 currencies.
     • While trade uncertainty has retraced from its November peak, lingering concerns remain a significant headwind for EUR.

   • Relative Monetary Policy:

     • The ECB’s pricing is viewed as bearish, especially in comparison to the Federal Reserve, which continues to display a more hawkish stance following the robust US December jobs report.

2. Positioning Risks:

   • USD Positioning:

     • Extended USD long positioning raises concerns for a potential pullback.
     • This dynamic adds a degree of caution to outright EUR/USD downside trades, leading BofA to favor cross-specific strategies.

   • Euro Area Sentiment:

     • BofA notes that Euro-area bearishness is becoming stretched, creating potential limits to further near-term EUR declines.

3. Preferred Trades:

   • EUR/JPY Downside:
     • Monetary policy divergence with a potentially hawkish BoJ provides room for EUR/JPY weakness.
   • EUR/CAD Downside:
     • The CAD’s relative resilience and potential trade uncertainties favor EUR/CAD downside in the near term.

Conclusion:

While EUR sentiment remains weighed down by trade uncertainty and ECB policy divergence, extended USD positioning leads BofA to favor EUR/JPY and EUR/CAD downside over broad-based EUR weakness. These cross-trades offer tactical opportunities amidst stretched bearish positioning on the Eurozone.

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This article was written by Adam Button at www.forexlive.com.