The EUR has moved higher versus a few currencies. I am bullish on EUR over a very long period of time. I am also bearish on EUR versus a few of the other currencies, making this a delicate matter. Everything is relative and although EUR may move higher versus USD over time, I see there being some choppy trading ahead as well as EUR sliding versus other currencies. If you are going to trade EUR, here are some key elements to factor in.
First, I am expecting EUR to soften versus USD. The ECB was slightly doves whereas the Federal Reserve was anything but. That relativity is going to push interest rates upward in the United States. The interest rate differential will favor USD over EUR. I expect EURUSD to slip from this level and have been thinking that for some time.
Largely, the ECB is still involved in their QE and plan on continuing to be there. However, the Federal Reserve is taking the opposite route and undoing what they did during their own, respective, Quantitative Easing polices; allowing interest rates on long end bonds to increase.
Ostensibly, since the Fed is raising short term rates while simultaneously changing direction on their QE policy, long end bond yields will go higher. The long end on the United States Treasury is low, a disconcerting aspect of my analysis. I am a big believer that the U.S. economy is slowing. However, the Federal Reserve is still raising rates and undoing their QE policies. The long end interest rates will move higher if the Fed is actually going to go through with this policy.
With long end yields rising, the differential between the United States and the EU will mean that investors will start to sell off EURUSD because of the interest rate differential and the basis trade, a.k.a., the carry trade.
I am mostly bullish on GBP. I might be the only human being in existence that is; I am fine with that. Those are the moments that while it feels risky, I usually end up being right.
In Great Britain, there is inflation. There is more inflation in Great Britain than nearly any other major industrialized country out there; inflation for the United Kingdom is 2.9% year-over-year.
In fact, and, as the chart above shows, inflation is Great Britain is moving higher. Any argument for more QE, or extending QE is going to be a very difficult argument to make. Because of that, I expect that the Bank of England will change its tone. And, when it does, GBP will take off considerably.
The other thing to consider is the type of position. I rarely, if ever, put on a straight, plain-vanilla spot trade. I do not like being involved on micro level with my trades. Also, the last person on earth who is ever going to declare that this is the absolute moment to go short/long a currency is me. My timing is almost never 100% accurate. Because of that, I always put on options trades to allow for wiggle room.
However, I think the move higher in EURUSD is exhausted. If you look at the above chart, EUR has failed to move higher above its recent highs and is, instead coming downward. This is an opportunity and I am selling calls at that level.
We are going to be getting more economic data over the next 2 - 3 weeks from both the EU and GB. I expect the data to continue to show that inflation in Great Britain is high. I also expect that the data out of the EU is weak. This will have a significant effect on the EURGBP cross. I am short that currency and looking for a solid move lower.
Since the rally around October, I have gone short EURGBP several times. Every time the currency hits these levels, approximately the .8600 level, I go short.
But, I am now officially nervous. I feel very confident in my analysis. But, I have put on several trades, the very same exact trade - short EURGBP from .8600 and picking up a 1% move to the downside. The reason I am nervous this time is simply that after some 25 years of trading, I have never known the very same trade to work out exactly the same four times in a row. That just reeks of too many variables.
But, unlike any other time, I believe the fundamentals are stronger now than any other time with relation to the trade. Still, I am too wise and battle trodden to take anything for granted.
This trade is going to be simple: I am going long a 6 month, out-of-the-money, .8300 EURGBP put, plain vanilla. If this trade works, which I expect, then I believe the cross will break through .8000 and print well below that level. I think the market is correct in being reluctant to go short this currency simply because of the fact that Brexit is looming too large. Regardless, the EU fundamentals are being ignored relative to what is currently happening in GB.
I have a very tough time feeling comfortable with a long position on EURUSD based upon the differential. Therefore, I favor a short position. That puts EURGBP in an excellent position to move lower.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am going long a EURGBP put, .8300 strike with 6 months to expiration.