Everyone and their mother is bearish on Europe and the euro these days. Plenty of reasons support the bearish case, such as a strong dollar, the conflict on Europe’s outskirts, or the upcoming economic recession.
But trading is often contrarian. Therefore, for those willing to take the other side of the bearish bet, here are three reasons to buy the euro here:
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- Negative sentiment on the euro has reached extreme levels
- ECB to turn more hawkish
- End of Russia-Ukraine conflict
Extreme negative sentiment
Whenever positioning reaches extreme levels, traders and investors should pay attention. For example, the fear and greed indicator is a good example of the market’s sentiment, and it often shows bottoms and tops in the stock market at extreme levels.
The same for currencies. Anyone trying to build a bullish case for the euro would have a hard time because all factors point to the downside. However, an extremely negative sentiment often precedes a short squeeze.
European Central Bank turning more hawkish
The European Central Bank (ECB) delivered one 75bp rate hike at its last meeting. Markets now have priced in another similar move.
Besides hiking the key interest rates, the ECB has other tools at its disposal to tighten the policy faster if needed. For instance, it may end the reinvestment of debt securities, thus starting quantitative tightening.
Also, the balance sheet will automatically shrink once TLTRO or Targeted Longer-Term Refinancing Operations mature.
End of Russia-Ukraine conflict
Last but not least, the major blow for euro short-sellers may come from the end of the Russia-Ukraine conflict. Since Russia invaded Ukraine in February this year, the common currency was sold aggressively, on any spike.
Short-sellers should be aware that the burden of war weighs on the euro. The euro will massively squeeze higher across the FX dashboard if peace is announced anytime soon.
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