EUR/USD resilience could come to an end if supportive December flows like corporate yearend earnings repatriation and banks’ euro buying ahead of the AQR do not extend into January, argues Citibank.
"EURUSD remained rather resilient of late consistent with the pattern of euro outperformance in the month of December we had in recent years... Bank inflows into EUR in particular have intensified noticeably in Q4 according to Citi FX flow data," Citi notes.
"As shown in Figure 3, the EURUSD outperformance in December was often followed by underperformance in January suggesting that the pair may look vulnerable again if the supportive December flows do not extend into the New Year," Citi adds.
"We also note that EURUSD still looks quite overvalued compared to a gauge of relative economic surprises out or the Eurozone and the US Our fair-value model based on EUR-USD rate spread, FX volatility, market positioning and relative bank performance suggests that EURUSD should be trading at 1.3200," Citi projects.
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