Euro: Positioning-driven recovery prospects – TD Securities

TD Securities’ Macro Research team, led by Jayati Bharadwaj with contributions from Howard Du and Linda Cheng, argues that recent EUR/USD weakness has been driven by high Oil and diesel prices and French OAT concerns. They see sentiment stabilizing, expect near-term Euro pressure through October, but are fading the EUR/USD selloff via a 3‑month risk reversal expressing a bearish Dollar year-end view.

Euro pressured yet sentiment stabilizing

"We expect EUR to remain under near-term pressure as markets navigate key October dates and the Moody’s ratings review. While renewed fiscal concerns have weighed on EUR, the reaction remains relatively tame compared with the last episode of comparable OAT-Bunds widening."

"We therefore see scope for near-term EUR underperformance, but not a derailment of the broader trajectory beyond October, particularly if France can keep the 2027 deficit in the low-5% range and stress remains concentrated in OATs rather than becoming a systemic euro-area concern."

"Our trend-following framework suggests the USD rally was becoming stretched vs EUR, GBP, CAD, SEK and MXN. G10 FX positioning is also now broadly short vs the USD except for JPY."

"We prefer to fade the EUR/USD selloff than to chase it back to the pre-Liberation Day range. We entered a long EUR/USD trade via a 1.16/1.11 zero-cost risk reversal."

"We fade the EUR/USD selloff via risk reversal. We entered a 3m EUR/USD risk reversal (buy 1.1610-strike call funded by short 1.11-strike put) last week to express our bearish USD year-end forecast at attractive spot entry level."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)