EUR/USD: 1.18 Is Upside Target But Positioning & Valuation Warn Of A S/T Pullback

EUR/USD made a move to the upside, reaching the highest levels since 2015. What’s next?

Here is their view, courtesy of eFXnews:

Nordea FX Strategy Research argues that as long as the convergence story between the Euro area and the US remains a story, 1.18 is likely the target for EUR/USD.

However, in the near-term, Nordea notes that both of EUR/USD positioning and valuation point to stretched readings which suggest the risk of a short-term pullback.

“We have been in the buy on dips camp for the EUR/USD throughout most of the year, but with the recently renewed spike, we are closing in on important valuation levels. 1.18 is the long term average of EUR/USD while levels around 1.155-1.16 are close to the fair-value for the cross given a market based fair value model framework. So from a valuation perspective, it is a getting increasingly difficult to really get overexcited on further EUR/USD upside, though with the caveat that the EUR asset repricing is probably not done yet, if the ECB tapers hawkishly during the fall,” Nordea argues.

“And if we look towards momentum in positioning recently, the USD is second most hated currency in the world currently. Only topped by the RUB. Judged solely from positioning it is hard to see why EUR/USD momentum shouldn’t slightly reverse within shortly, as it will take only a few upbeat stories from the Trump or the Fed camp for this clearance sale to come to a halt,” Nordea adds.