Chart alpha: Six reasons to short euro

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Chart alpha: Six reasons to short euro

Six reasons to short euro

USD still underpricing relative fundamentals

As we noted last week in Fading the USD Vibe-cession 13 May 2026, USD sentiment (by

several measures) seemed excessively downbeat relative to fundamentals. US data (vs.

G10) has notably surprised to the upside, and the market is still only slowly coming

around to the view that the risk of Fed hikes is underappreciated.

Meanwhile, the pricing of hikes for several other G10 central banks appears at/near

reasonable limits. This appears particularly evident for those exposed to growth

headwinds stemming from higher oil prices, such as the ECB. Of note, BofA Rates

strategists see scope for further shifts in US-EA spreads, in favor of the USD (Occam’s

razor applies in rates 12 May 2026; Global Rates Weekly: NACHO rates 15 May 2026).

Separately, ongoing US equity outperformance-- driven by tech/AI-- also poses upside

USD risks.

With EUR/USD still within its 12m range, we see scope for the pair to decline towards

our Q2 forecast of 1.14. To be clear, from a fundamental perspective, this expression

represents a more near-term/tactical US-centric view, as opposed to a broader euro

view. As noted in For all the talk, EUR-G10 FX still looks fair 12 May 2026, EUR looks

more fairly priced versus other G10 currencies, ex-USD. Fundamental risks to this trade

include a rapid deescalation in the Iran war, resulting in lower oil and gas prices, or a

material turn lower in US data that quells any talk of potential Fed hikes.

Chart 1: Data trends diverging between the US and Euro Area… Chart 2: …while the USD looks attractive relative to rate

US & EA Economic Change Indices differentials

EURUSD vs. EA-US 1y1y rate differentials

200 -0.5

100 1.18 -0.7

-0.9 1.15

-100

-200 -1.1 1.12