The EURUSD has continued to rise in recent weeks as the USD has remained pressured. With everything happening in the global economy, it is easy to forget the poor economic situation the EU was in prior to the Covid-19 crisis. Things have certainly not become magically better in the middle of a global pandemic. What strikes us the most is the fact that this rise is occurring in a very risky environment. It is not just USD weakness, EUR long futures positions are at fairly extreme levels historically. This past week, large speculators added to long futures positions maintaining a larger net long position than we have seen since 2018. Small speculators are already at all-time long positions and we know how that usually ends.
We see this as a prime setup for an unwind. The EU Summit is currently in focus this week and we believe a positive outcome is already mostly priced in. We have a developing divergence between the EURUSD spot price and the large speculator net long positions, which is something that we love to see ahead of a swing trade opportunity. This means that the spot price is rising as large spec positions have declined.
We are looking for a sell opportunity in the 1.1520 – 1.1550 range for a decline that we expect to push us below the January 2017 low and toward parity. Our bearish outlook for US and European equities are also supportive of the idea. A return to risk aversion will boost the USD on safe haven flows and put even more pressure on the single currency.