Euro Optimism Losing Mojo as Strategists Make a Bearish Turn

(Bloomberg) -- After surging this year to the highest since 2018 against the dollar, the euro is losing its luster and strategists are beginning to pull back on their bullish views.

The shared currency on Wednesday touched the lowest level in two months on concern the European Union is facing tens of billions of euros of lost economic output because of delays in rolling out vaccines to stem the pandemic. Nomura International Plc says it’s unwinding long bets on the currency in the short-term, while Deutsche Bank AG says the euro could be headed for levels last seen in November. Options traders, meanwhile, have turned the most bearish since June.

Many strategists came into 2021 bullish on the common currency amid expectations the European Union’s recovery package would buoy growth. But the region’s failure to secure vaccinations at a pace comparable with the U.K. and the U.S. has added to fears of a double-dip recession as lockdowns extend. Meanwhile, the dollar has revived in the past month as the prospect of additional American economic stimulus has pushed up Treasury yields.

“The euro’s deviation from fair value began roughly when the vaccination gap became news at the beginning of the year,” Steven Englander, head of Group-of-10 FX research at Standard Chartered Bank, said via email. While he’s still bullish on the euro, the vaccine issue “adds a downside risk factor.”

Leveraged funds trimmed euro longs last week from the highest since September, according to the latest Commodity Futures Trading Commission data.

In the meantime, strategists are growing a bit more bullish on the dollar. For Nomura’s Jordan Rochester, the euro’s decline toward $1.20 “is not just psychological,” he said. His team is entering a currency options contract to capture the risk of a continued move lower, and plans to buy it back on a dip later this month.

The euro touched $1.2004 on Wednesday, the lowest since Dec. 1. It reached $1.2349 on Jan. 6, the highest since April 2018.

Societe Generale SA’s Kit Juckes, the firm’s chief FX strategist, recommends investors sell the shared currency versus the Norwegian krone and the Swedish krona, and against the Swiss franc if the euro breaks below $1.20. Meanwhile, Deutsche Bank’s George Saravelos sees a drop toward $1.18 because of the region’s relatively slow reopening.

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