There are several reasons I'm looking for opportunities to short the EUR/USD (especially over the next week):
- Most USD crosses (and the US stock market) had paired at least some of the gains seen after the FOMC meeting, while the EUR/USD held steady and outperformed despite a lack of new data to support this performance.
- ECB's more dovish tone ever since early September.
- Economic data has been roughly as expected (and arguably a bit worse than expected) during September.
There are of course some reasons to be cautious about going short the EUR/USD:
- Banks repaid more of their LTRO loans to the ECB than was expected last week, although the market's reaction to this was muted, and I see this issue as relatively mute considering the ECB's dovish tone.
- Congress' fiscal showdown could cause the USD to weaken. I see this as a real threat, but I think that it will cause more volatility than any real lasting movement in the EUR/USD, as I expect Congress to muddle through the issue at the last minute as they have so often done.
- The market may continue to digest the FOMC minutes, and I will keep a close eye on any general US Dollar weakness.
- If Janet Yellen is nominated as the next Fed Chairman, the EUR/USD could push a bit higher.
- As is always the case, economic data released this week could change my outlook.
Last, but certainly not least, German elections will be held Sunday. I don't think this will cause much EUR/USD volatility. Whether we have a “grand coalition,” or whether Merkel has a stronger coalition won't have much of an impact on the EUR/USD IMO. I base this largely on the EUR/USD's generally muted reaction to past German elections. Still, this is something to keep an eye on.
It's worth noting that I've read/heard a lot of interesting opinions arguing that the EUR/USD will go higher. However, most of these opinions are based on technical analysis or the argument that economic data has been better. While economic data has indeed been better (as Draghi and others have said), it has not been better than expected lately, and the slightly better than expected data that we saw in the previous months has already been priced in IMO. In regard to the long recommendations that rely on technical analysis, I don't believe in technical analysis in general, and nothing about these arguments does anything to convince me. (If you want to know more about why I don't believe in technical analysis, please ask.)
All in all, the dovish tone, the less than stellar economic data, and the fact that the EUR/USD outperformed last week mean that I am looking for chances to sell the EUR/USD, especially on any rallies.