Small Window Opens for Euro Short Covering – Will Market Oblige?

Talking Points:

- ECB stress tests 'better than expected,' EURUSD rallies.

- Post-test gains wiped out by weak German business survey data.

- October Forex Seasonality Foretells End of Seasonal USD Weakness

Not much has gone right for the Euro over the past few months, but a swirl of internal and exogenous factors may be colliding this week to open a small window of opportunity for recovery.

After the ECB's stress tests revealed that 25 banks failed to meet the standards, but after 12 covered their capital shortfall, only a €9.5B hole remained in the balance sheets - much less than the market expectation in the low tens of billions.

If sovereign QE is coming, it is probably being pushed back later into 2015. The recent uptick in Euro-Zone data speaks to the stabilization ECB policymakers were hoping for after their successive TLTRO and ABS-program launches. The Citi Economic Surprise Index shot up to -36.8 by the end of last week, off the yearly low of -57.3 set on October 14.

Futures positioning remains stretched as well, which would be the fuel for the covering rally. Non-commercials/specs held 159.4K net-short contracts for the week ended October 21, an increase from the 155.3K net-short contracts held a week earlier.

The exogenous factors lay with the US Dollar. There are numerous 'medium' and 'high' events on the DailyFX US Dollar Economic Calendar this week, including October Durable Goods on Tuesday, October Consumer Confidence on Tuesday, October FOMC meeting on Wednesday, and Q3 GDP report on Thursday.

Read more: Short-term Euro Rebound Due as Data Improves, Stress Tests Pass

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail [email protected]

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