Citi Research, a prominent financial institution, has recently taken a more pessimistic stance on risk investments. They are advising investors to sell any EUR/USD rallies in the current market environment. This shift in sentiment comes at a time when the EUR/USD pair is trading slightly higher at $1.0926, after experiencing a small decline of 0.3% over the past week.
The U.S. bank highlighted several reasons for their bearish outlook on risk. They pointed out that volatility typically increases in the run-up to the U.S. election, and there are growing concerns about a possible recession in the United States. The recent nonfarm payrolls report reinforced this view, leading to a reassessment of the likelihood of a significant economic downturn.
In response to these trends, the market saw safe haven currencies outperforming, while previously popular carry trades faced unwinding pressure. However, in a surprising turn of events, higher beta currencies like the Australian Dollar, Canadian Dollar, Norwegian Krone, and New Zealand Dollar outperformed lower-yielding currencies such as the Japanese Yen and Swiss Franc in the past week. Citi predicts that G10 currencies will continue to be influenced by overall market sentiment.
Analysts at Citi pointed out that the trading landscape is evolving rapidly, with a stronger emphasis on tactical decision-making. They highlighted a shift in focus from inflation indicators to labor market data and overall economic growth. Looking ahead, they believe that U.S. retail sales and initial jobless claims will play a more significant role in shaping market sentiment than inflation figures in the upcoming weeks.
As part of their revised outlook, Citi now anticipates a total of 125 basis points in interest rate cuts by the end of the year. This projection exceeds the current market expectations of around 100 basis points in cuts over the same period. The bank emphasized that the market will likely see a continued dovish repricing due to uncertainties surrounding the labor market strength and potential inflationary pressures.
Citi Research’s latest recommendations underscore the evolving nature of risk investment strategies in response to changing economic conditions and market dynamics. Investors would be wise to carefully consider these factors when making investment decisions in the current environment.