Euro: Headwinds ease as energy costs fall – MUFG

A relief rally in the Euro (EUR) is being supported by lower energy prices, which are easing external pressures on Euro area economies, according to MUFG’s Lee Hardman. With leveraged funds holding substantial short EUR positions, fading energy concerns could leave the currency exposed to a short squeeze. Sentiment is also benefiting from a narrower French-German yield spread and easing French fiscal risk.

Can easing risks sustain support for the Euro?

"The euro is staging a relief rally encouraged by lower energy prices, which if sustained would help ease headwinds for euro area economies."

"Short euro positions have increased sharply since mid-September and have hit their highest level since the start of the COVID shock in early 2020."

"It leaves the euro vulnerable to a short squeeze in the near-term if the investor concerns over the scale of the energy shock continue to fade."

"At the same time, the yield spread between 10-year French and German government bonds has narrowed alongside lower energy prices."

"The price action highlights that further progress towards a US-Iran deal would help make it easier for French politicians to restore investor confidence."

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