Euro short positions surge, bearish arguments gradually weaken

⑴ The euro against the US dollar has fallen toward its 2026 low of 1.1105 after US inflation data came in higher than expected, reinforcing market expectations of further Federal Reserve rate hikes and prompting traders to sell the currency pair. ⑵ However, trends in the forward and bond markets, as well as expectations for changes in eurozone interest rates, do not seem sufficient to support the extremely bearish positions that traders are currently establishing. ⑶ Speculators have further expanded the largest net short euro position since 2015, with the net short positioning reaching $22 billion as of November 3. The previous record net short was around $30 billion during the 2015 eurozone debt crisis. ⑷ Futures markets indicate that by next July, US interest rates could rise by a cumulative 74 basis points, while markets expect eurozone rates to rise by a cumulative 97 basis points over the same period. ⑸ The one-year euro against the US dollar forward swap is about 184 points, roughly in line with January levels, while the yield spread between US and German 10-year government bonds is 166 basis points, lower than the approximately 184 basis points in October. ⑹ Recently, oil prices have plummeted, easing one factor putting downward pressure on the euro, while the French bond market has also stabilized. ⑺ However, as US inflation data exceeded expectations and the probability of a 50 basis point Fed rate hike increased, traders have aggressively sold the euro. After a hawkish statement by a Fed policymaker, that probability has risen to about 10%. ⑻ The market reaction to the inflation data, especially with falling oil prices likely to curb inflation, has prompted speculators to further increase short positions near the recent lows since the exchange rate started falling from near 1.21. ⑼ Given that the monetary policy outlooks for the US and the eurozone are generally balanced, and considering that the eurozone has more room to raise rates, the situation may even slightly favor the euro, making the current scale of bearish positions appear increasingly excessive. ⑽ The biggest shift this year has been in market positioning, with traders moving from a record net long position in January to a record net short position in November, selling close to the lows of the 1.2084 to 1.1105 decline, further increasing the already high risk of a reversal.