Investing.com – Citi Research has become more bearish on risks, recommending selling any rallies.
At 07:00 ET (11:00 GMT), the EUR/USD pair was up 0.1% at $1.0926, after falling about 0.3% over the past week.
The U.S. central bank signaled last month that it had become more bearish on risks, noting that volatility tends to move mechanically higher as the U.S. election approaches, as well as concerns that the U.S. is headed for recession. The release of nonfarm payrolls data has accelerated that view as markets repriced in the possibility of a sharp downturn.
This initially led to safe haven FX outperformance and triggered a sell-off of congested carry positions. Last week saw a reversal as higher-yielding FX currencies (AUD, CAD, NOK, NZD) outperformed and lower-yielding currencies (JPY, CHF) lagged.
Citi confirmed that the G10 FX market will continue to trade according to risk sentiment.
“Markets have reached a turning point where the trading environment has become increasingly tactical and the catalytic focus has shifted from inflation to the labor market and growth,” Citi analysts said in an Aug. 12 note.
“The latter suggests that U.S. retail sales and initial claims will be more important in the risk backdrop than next week’s U.S. CPI,” Citigroup added, adding that “more clarity is expected in the coming weeks.”
Citibank has revised its call for the Fed and expects 125 basis points of cuts through the end of the year. With markets pricing in cuts of around 100 basis points over this period, this creates an asymmetric repricing until further signs of stability emerge.
“We emphasize here that a dovish repricing based on non-linear labor market weakness (USD+) is not the same as a dovish repricing based on a confirmation of deflation (USD-). The USD has clearly underperformed during this latest bout of risk aversion, but we remain bullish and are willing to sell any EUR/USD rallies towards 1.10.”
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