EUR/USD still a ‘sell on rallies’ – Danske Bank

Analyst Mathias Mogensen at Danske Bank still recommends selling the pair on occasional up ticks.

Key Quotes

“Currencies of oil-producing countries gained further overnight as the OPEC deal was officially announced. As for the rest of the FX market, we will probably have a relatively quiet start to a very busy week, as investors digest the news of the OPEC deal and await the FOMC meeting on Wednesday where both we and the market expect the FOMC to hike the Fed Funds rate”.

“Although a 25bp rate hike is almost fully priced in, we still see a case for a further short-term squeeze lower in EUR/USD – especially as the ECB’s Draghi last week managed to deliver a relatively dovish message at the ECB meeting. Hence, in the short term, our tactical view is still to sell on rallies”.

“However, while we could still see EUR/USD dropping below 1.05 in the short term, we still hold the view that EUR/USD is likely to go higher in 2017 despite Trump. Beside the fact that flows and positioning are EUR positive and that EUR/USD is fundamentally very oversold, we also note that the Fed’s trade-weighted dollar has reached the strongest level since 2002. If the USD becomes too strong, the Fed will turn dovish exactly as it did early this year”.

“We target EUR/USD at 1.12 in 12M and we advise EUR- and DKK-based clients with USD income/assets to take advantage of a possible further USD rally and increase hedge ratio on USD exposure”.

“Given the large political uncertainty surrounding both EUR and USD next year  (elections and Brexit in Europe and Trump), we generally recommend to hedge USD exposure via options that maintain a profit potential in the event of further decline in EUR/USD next year”.