Hedge Funds Turn Negative on Euro Ahead of ECB Decision

Hedge Funds Dump Euro Positions

• Hedge funds have dumped nearly 90% of their net long euro positions in just one month.
• Speculation is growing that policymakers will pause an aggressive hiking cycle.
• Traders are pricing just a 40% chance of one more quarter-point hike by the ECB.

Growth Deterioration Raises Concerns

While inflation remains above the ECB’s target, signs of growth deterioration are mounting.

This has led to bets against the common currency, resulting in a nearly 5% drop since mid-July.

Expert Opinions

Janet Mui, head of market analysis at RBC Brewin Dolphin, believes the ECB will pause, leading to further weakness in the euro.

HSBC Holdings Plc and Capital Economics warn of a deeper drop towards parity with the dollar.

Antony Foster, head of G-10 currency spot trading at Nomura International Plc, says most hedge funds are bearish on the euro and bullish on the dollar.

Euro-Zone Economy and Greenback Strength

The euro-zone economy barely grew in the second quarter, leading to a shift in sentiment.

Previously, the market believed the US would go into recession while Europe would escape it, but now it’s the other way around.

This has boosted the greenback, with the Bloomberg Dollar Spot Index on its longest weekly streak of gains.

Continued Bearish Trend for Euro-Dollar

Positioning analysis by Bank of America Corp signals a “bearish continuation” for the euro-dollar trend.

Euro-zone data has been consistently negative compared to the US, which supports this downward trend.

Support Level and ECB’s Resolve

The euro needs to break through the $1.05 level to continue falling.

Grace Peters, head of investment strategy for Europe, Middle East, and Africa at J.P. Morgan Private Bank, believes the ECB will support the euro with another rate hike.

Options traders are betting that the $1.05 level will hold as a support level.

Euro Zone’s Ability to Handle Higher Borrowing Costs

The euro zone is unlikely to handle even higher borrowing costs, giving the US economy an edge.

There is a risk of stagflation in Europe, which is not good for the euro or other assets.

With assistance from Vassilis Karamanis, Naomi Tajitsu, and Thomas Hall.

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