Italy’s uncertain environment brought EUR overshoot scenario to an end, Morgan Stanley

The uncertain political environment post the Italian election has brought EUR overshoot scenario to an end, according to research published by Morgan Stanely, which suggests that further EUR/USD upside potential in the coming months is likely to be more limited.

“The near-term risks have shifted to the downside. As a result, we closed our long EUR/USD position from 1.3090 as recommended at 1.3150,” the bank said.

While the inconclusive Italian elections have dented risk appetite, likely having a broader impact on global currency markets, the liquidity side of the equation remains intact.

“Hence, corrections to recent trends could prove to be short-lived. Indeed, the prospect of further monetary policy action from Japan has been given another boost by the official nomination of Kuroda as the next BoJ governor. Hence, we believe that the pullback in USD/JPY will remain limited, providing a renewed buying opportunity,” Morgan Staley said.

Analysts believe the moving of the monetary policy goalposts in the UK will leave GBP vulnerable. Indeed, inflation expectations are already on the rise, driving UK rate and yield differentials on some measures deeper into negative territory.

“This is reducing the attractiveness of GBP from an investment perspective, as well as eroding its safe-haven credentials. We keep our focus on GBP/USD, where the risk of a more significant move lower is now building, in our view,” they said.

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