EUR/USD’s recent strength seems driven by a combination of euro-positive and dollar-negative factors, but this is likely to be in the process of taking a different turn, argues Citibank.
On the USD side, Citi’s economists expect better data out of the US over the coming days to give USD a boost.
“To the extent that the US housing data does not disappoint significantly on Friday and given that some negatives seem to be in the dollar price by now, EURUSD maybe even close to topping out,” Citi projects.
More importantly, Citi outlines 3 important downside risks for EUR that seem to be lingering in the near term.
1/ The rally in the periphery is inherently dependent on ECB’s willingness to alleviate any future strains in the Eurozone money markets as we move closer to European bank stress tests.
“Uncertainty about the willingness of the Governing Council to put an end to the SMP sterilization may persist into the March policy meeting. This could put a lid on any euro gains in the near term,” Citi clarifies.
2/ The lack of clarity on the prospects for more longer-term liquidity assistance in the form of FLS or LTRO may have a similar effect.
“It doesn’t help that the recent ruling of the German Constitutional Court likely eroded the credibility of ECB’s OMT program. Next week’s M3 data would provide a timely update on the credit crunch in the Eurozone and may highlight the need for more ECB action,” Citi adds.
3/ Disinflation and the risk of deflation remains a risk for the euro.
“Investors may be cautious not to chase the euro higher from here going into the preliminary HICP inflation data for February due next week,” Citi advises.