The euro has been in demand of late, and Bank of America Securities noted that long positions in the single currency have climbed to historic levels.
At 10:15 ET (14:15 GMT), EUR/USD traded 0.2% higher to $1.0873, up over 3% so far this month, and over 5% higher since the start of the year.
The German fiscal announcement has driven the sharpest jump in EUR positioning and sentiment in the history of our FX and Rates Sentiment Survey, analysts at the Bank of America Securities said, in a note dated March 14.
Sentiment and positioning is now almost at par with the levels reached in August 2020 after the NGEU announcement of July.
The Next Generation EU (NGEU) is a European Commission economic recovery package to support the EU member states to recover from the COVID-19 pandemic, in particular those that were particularly hard hit.
“Markets are clearly viewing the change in Germany’s fiscal stance as comparable to the decision to jointly issue debt in response to the pandemic, probably helped by rather optimistic assumptions on EU defense spending,” said BofA.
“Not surprisingly, we also see a sharp increase in ECB terminal rate expectations, with 88% of respondents seeing terminals at 2% or higher, and only a minority now worrying about an inflation undershoot in 2025.
Consequently, euro core duration positions have fallen sharply and are short for the first time since spring 2023, the bank said.
On the flip side, there has been a dramatic reversal in USD FX sentiment from extremely bullish in Dec ‘24 to the most bearish levels since 2021, BofA said, but still far from historical extremes.
Moreover, while positioning has flipped short, it is severely lagging the sea change in sentiment. The gap between bearish USD views and positioning is at levels observed in June/July 2020 when a brief period of stability preceded a large sell-off for the remainder of the year.
Long rates and short risk remain higher conviction trades to express the fading of US exceptionalism than short USD positions, the bank added
