If Risk-On Drivers Return
The market continues to operate under the assumption that Washington will find a resolution ahead of the relevant debt ceiling deadlines, even though the news flow remains volatile. As the crisis remains binary and the adverse scenario is close to impossible to contemplate, there is willingness to seek a ‘risk on’ case as talks continue. We still believe that markets are under-pricing US fiscal risks and
especially the associated medium-term growth drag, but investor positioning is asymmetric. The level of risk being run in cautious environment, as shown by our flow monitor from last week, is extremely light; short term resolution would ‘stop’ in these positions across assets and impact FX. On this note, we think our 1m EURUSD target at 1.37 remains appropriate – though much will depend upon the
Eurozone’s ability to sustain underlying asset market outperformance.
Read the full report: UBS