A very nice piece from Citi FX Spot FX Trading Commentary.

It says the EUR/USD is subject to conflicting signals (equities and peripheral debt suggest a much higher EUR/USD, but that 5-year rate spreads (Germany/USA) suggest much lower EUR/USD) and thus the net result is confusing crosswinds … “Stay away from EUR/USD”.

Instead, it says you “are better off selling rallies in EUR/GBP”:

Concedes the trade is crowded,

  • “but so was AUD/NZD all the way down…”
  • “AUD/NZD: Continued hawkishness was enough to keep the trend going”

And goes on:

  • “EUR/GBP: Continued hawkishness is enough to keep the trend going” (that is, Bank of England hawkishness)

And then offers up “EUR/GBP shorts: Lessons from the AUD/NZD trade”:

  • Divergent central bank policy can create sustainable trends
  • Positioning can stay stretched for a very long time—don’t worry too much about positioning
  • Keep selling rallies
  • Rallies in EUR/GBP tend to be around 200/250 pips
  • Take profit when the Bank of England hikes