Global growth remains desynchronised. In particular, Fed policy has been ‘too tight’ in recent years, and the US economy has therefore rolled over into a ‘soft patch’ (characterised by a weak labour market and a recession in key sectors like housing and manufacturing). In Europe, in contrast, ECB policy easing has been relatively significant and a cyclical growth reacceleration is now underway.
The Fed’s attempt to ‘catch up’, and switch back to looser policy, has therefore been a key theme in markets this summer. US bond yields have fallen across the curve while Fed rate expectations have moved notably lower. Last week, for example, the 5 year real yield fell to its lowest level since early 2023 (while European rates have remained stable/rangebound). That has pushed the EUR sharply higher against the USD, with EUR-USD reaching 1.18 on last Wednesday’s Fed rate cut (see fig 2).
In the near term, the rally in the Euro is overdone. Net long positioning, for example, is crowded (fig 3); sentiment is bullish (a contrarian SELL signal); and a number of price based models show that the Euro is technically overbought. Aggregating those indicators, our medium term ‘market timing model’ for the Euro is back on SELL. This indicator has generated timely signals in recent years (i.e. at key turning points, fig 4).
In the medium to long term, though, the Euro has broken above its downtrend channel (in place since 2008, fig 1). The question, therefore, is: Will this be a false breakout? Or is this the dawning of a new secular uptrend in the Euro? In the near term, we expect some giveback. Longer term, the reasons for a new secular bull market in the Euro are building (see recent Longview research for detail).
Fig 1: EUR-USD futures candlestick shown with 50, 90, & 200 day moving averages
Fig 2: UST-Bund spread (5yr real yields) vs. EUR-USD
Fig 3: Net speculative positioning in EUR-USD vs. EUR-USD
Fig 4: Longview EUR-USD ’Market Timing Model’ vs. EUR-USD
