EUR/USD could extend its latest drop in the very near term on the back of the following 3 reasons, says Citibank.
1- Euro banking sector risks seem to be on the rise yet again. The ratio between Eurozone and US bank stock indices has slumped close to its record low from July 2012. The last time the European bank stocks traded that low EUR/USD was close to 1.2000. These developments could be addressed at the upcoming EU summit on June 27-28. That said, the risk of disappointment remains and this could weigh on European bank stocks and the euro.
2- Government funding costs are moving back to their highest level since the start of the year across the Eurozone. French, Italian and Spanish bonds have reversed earlier gains and came under fresh selling pressure most recently. This in combination with renewed investor concerns about Greece could trigger another spike in the Eurozone peripheral risks and weigh on EUR.
3- Despite the latest dip in EUR/USD, EUR still looks rather strong across the board. Euro money market rates move ever closer to their February highs as well. These developments look very similar to the tightening of the financial market conditions evident in the run up to the rather dovish ECB meeting in February 2013. A potential repetition of these events could make investors rather cautious on the near term outlook for EUR/USD ahead of the ECB meeting on July 4.
All up, Citi added a short EUR/USD position to its G10 macro portfolio targeting a move t0 1.2750, with a stop at 1.3315 and a 2% VaR risk weight.
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