Euro: Recovery led by spot demand – BNY

BNY’s Geoff Yu notes the Euro is stabilizing ahead of the ECB decision, with improving spot flow and hedge unwinding supporting Eurozone assets. However, forward and swaps demand remain weak, limiting conviction. EUR/USD is seeing light bids, while EUR/GBP appears more attractive on a risk-reward basis given under-owned positions and potential recovery if Pound momentum fades.

Spot-led Euro recovery before ECB

"EUR is finding a steadier footing ahead of today’s ECB decision, but the recovery is still incomplete. Spot flow is improving and hedge unwinding continues to support the currency, reinforcing the broader Eurozone asset recovery story. The move is not yet backed by strong forward or swaps demand, however, and this matters because EUR holdings still need meaningful recovery flow before they return to more normal levels."

"Hedge unwinding is the clearest source of EUR resilience. Cross-border hedging is continuing to decline, and net exposure to Eurozone assets is at its highest level in more than two years. Still, onshore investors are not yet forward-buying EUR, which is limiting conviction."

"The cross picture is also important. EUR/USD is drawing light bids, but the flow signal remains thin. EUR/GBP looks more attractive on a risk-reward basis, even though it is facing net sales this week, because current holdings have struggled more sharply and leave greater scope for recovery if GBP momentum fades."