Bearish U.S. dollar view becoming "complacent"

Bank of America Securities warns against complacency regarding the consensus bearish U.S. dollar view, despite recent market rallies and fading geopolitical tensions that saw EUR/USD break $1.17. The bank advises tactical caution on chasing EUR/USD higher, citing reversal signals, and anticipates a downside surprise in U.S. payrolls that could trigger a risk-off unwinding of existing EUR/USD long positions. BofA prefers a bearish EUR/JPY view, suggesting the Japanese Yen holds the most G10 FX upside potential in a macro shock scenario, positioning against prevailing market sentiment.

Analysis

Bank of America Securities has issued a tactical warning against the prevailing consensus for a weaker U.S. dollar, flagging growing complacency among market participants. While the fading of a recent geopolitical shock has propelled U.S. equity indices to new highs and pushed the EUR/USD pair above $1.17, BofA analysts argue that the trend may be poised for a reversal. They cite technical indicators, specifically up/down volatility and residual skew, which suggest the EUR/USD uptrend is losing strength. The key near-term catalyst identified is the upcoming U.S. payrolls report. BofA's internal forecast is below consensus, and they anticipate that a surprisingly weak number would trigger a 'classic risk-off' reaction, leading to an unwind of long EUR/USD positions rather than accelerating dollar weakness. Consequently, BofA favors a bearish view on the EUR/JPY cross for the week, supported by a quantitative signal and the assessment that the Japanese Yen holds the most upside potential in a G10 macro shock scenario, especially as the EUR/JPY uptrend shows signs of stalling ahead of the ¥170 level.

Key Decisions for Investors

• Investors with long EUR/USD positions should consider the risk of a sharp reversal and may want to hedge or reduce exposure ahead of the U.S. payrolls data release.
• A tactical short position in the EUR/JPY cross could be considered, aligning with Bank of America's view that the Japanese Yen offers a superior safe-haven profile in a potential macro shock.
• Closely monitor the upcoming U.S. payrolls report, as a downside surprise relative to consensus is identified as the primary catalyst for a significant risk-off event and repositioning in G10 FX markets.
• Be cautious of the widespread bearish U.S. dollar consensus, as contrarian indicators and potential market reactions to economic data suggest it may be vulnerable to a correction.