Credit Agricole notes that the recent softness in the euro currency in part reflects the shift in market focus from US risks to that of Europe. That especially with dark clouds surrounding France's political climate as well as sluggish euro area data in general. The firm adds that the US government shutdown has also served to increase scrutiny on Europe, with there being little to judge conditions in the US over the past two weeks.
Besides the above, Credit Agricole also argues that profit-taking and some unwinding of EUR/USD longs is responsible for the recent decline. However, there are some positives that suggest that the pair might see the downside move be more limited from hereon.
The firm notes that the rates spread between the euro and dollar remains historically wide, indicating that the Fed's more dovish outlook is still outweighing everything else. Adding to that is the yields spread between French and German bonds have also stopped widening, suggesting that much of the negatives on French politics have been priced in. And I'm sure the latest developments overnight will only help to feed into that argument now.
Putting everything together, Credit Agricole sees European corporate hedgers as being likely to step up EUR/USD purchases near 1.1500. That as the figure level is also seen as a technical and psychological support level for the currency pair.
