Euro On the Move?

Financial news outlets are abuzz with today’s sharp decline in the British Pound:

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And, indeed, a nearly 2% move is newsworthy. Taking a look at longer-term data, however, we find that the term ‘freefall’ might be a bit premature. Sterling’s tendency to move in concert with changes in the net commerical position of traders shows that, while the currency is approaching multi-year lows, there is substantial historic support at this level:

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Meanwhile, on a purchasing power parity basis, the GBP is also at historic extremes (i.e. support):

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As we saw in this blog post from a short while ago, the European currency pair that we might want to pay more attention to is the EUR/USD. With a growing divergence between the commitment of traders’ net position and the exchange rate, it seems the euro could be about to strengthen a bit from its ~12% undervalued position versus the USD:

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Interestingly, if the euro were to continue rising from here and the following relationship holds, that implies a less negative interest rate differential. For that to happen, there has to we would expect some combination of higher (less negative) rates in Europe and/ or lower rates in the U.S.:

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