The global impact of US monetary policy [was] evident from the market reaction to Fed Chair Janet Yellen's dovish message this week. Yellen underlined the FOMC's cautious message from a fortnight before. In so doing, she threw more fuel onto the ongoing risk rally. Global equities and high-beta currencies rose. The dollar retreated, with EUR/USD heading towards the range highs of 1.15/1.16.
One party that might be unhappy about what has transpired is the ECB, with the trade-weighted euro now some 2% higher from when its quantitative easing programme was launched in January 2015. The upcoming UK referendum on EU membership has also contributed to broader euro strength, with Brexit fears helping drive EUR/GBP above 0.79.
The euro’s recent strength highlights again that the ECB has been unable on its own to weaken the single currency. Thus, a new cycle low in EUR/USD will require revived market expectations of a more hawkish Fed.
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That being said, the current level of EUR/USD does appear rather elevated given rate differentials, whether 2-year or 10-year. Some of the recent move higher in euro crosses can perhaps be explained by short-covering in euros and long-cutting in dollars.
CFTC data show that speculative positioning in the dollar remains net long (and net short in the euro), so there could be further upside to EUR/USD in the very near term. However, we expect to see EUR/USD capped at the range highs of 1.15/1.16.