Deutsche Bank exchange rate analysts have this morning warned that they are starting to see the downside risks to EUR/USD increasing.
"We're bearish over coming weeks. Don't forget to fund in GBP. Sell against all of G10 FX except USD and EUR. SNB measures running out of steam, EUR/CHF has peaked," says a morning note entitled FX Strategy Weekly.
The euro dollar exchange rate is currently 0.069% higher on the day with 1 EUR = 1.4493 USD.
Rate differentials, sovereign spreads and option market risk reversals are all pointing to significant downside risks for the euro, and Deutsche Bank remain bearish over the next few weeks.
According to analysts EUR/USD has often displayed a lagged reaction to other drivers, suggesting that one should not read too much into what may be temporary resilience.
"Next week's ECB meeting may be an opportunity for this recoupling to take place: While the rates market has already removed ECB rate hikes for the next twelve months, verbal confirmation of a more accommodative rate stance from Trichet may provide FX markets greater confidence on the use of the euro as a funding currency," says the exchange rate forecast note from Deutsche Bank.
Adding to the Deutsche Bank conviction; yesterday's PMI data is pointing to an acceleration of the negative growth dynamics in Europe over August, a worrying development in the context of ongoing peripheral stress.
Indeed, the breakout of Italian yields in June was precipitated by a significant downgrading to Italian economic growth.
Also adding to euro pressures are indications that equity inflows into Emerging Markets have slowed down significantly over the last few weeks.
"This suggests that the usual central bank reserve demand for the euro may wane, providing less protection on the downside. To be sure, the medium-term dollar picture has not turned positive and we continue to believe that EUR/USD has seen the highs and lows for the year, but we see downside risks in coming weeks," says Deutsche Bank.
