Deutsche Bank’s Euro Bear Flips Stance to Bullish After ECB

(Bloomberg) -- The European Central Bank's shift to more hawkish messaging was enough to change the mind of one big market bear: Deutsche Bank AG's George Saravelos.

The global head of FX research is now telling investors to go long on the euro-dollar pair after recommending a broadly bearish position on the common currency since September.

Lagarde told journalists on Thursday that the risks to the inflation outlook were tilted to the upside, particularly in the near term. That prompted the euro to rally as much as 1.3% versus the dollar, the most since March 2020. The euro advanced more than 1% against the pound, its largest gain since December.

Lagarde “clearly signaled a pivot from slow-moving calendar-based guidance to something far more active,” he wrote. The shift was the signal Deutsche Bank was waiting for to turn positive on the euro.

Deutsche Bank previously anticipated a euro advance in the second half of the year, with focus on the U.S. Federal Reserve's intent to raise interest rates supporting the dollar. It can happen sooner now that Lagarde has made a shift comparable to the Fed's in June and January, Saravelos said.

The euro had been lagging peers on expectations the ECB will trail the Bank of England and Fed in tightening policy. It fell around 7% last year as the dollar surged. The prospect of the ECB reacting faster to surging inflation, however, could transform its prospects.

Options are also reflecting this sentiment, with one-month euro-dollar risk reversals shifting in favor of calls for the first time this year and to their most bullish since May.

“A shift towards faster tightening by the ECB would provide a more positive backdrop for the EUR, although more explicit guidance might not be forthcoming until the March meeting and forecast round,” said Dominic Bunning, head of European FX Research at HSBC Holdings.

Others say Lagarde's change in tone won't stem the downtrend for the euro. Wells Fargo currency strategist Erik Nelson points to the eventual extent of the ECB's hiking cycle as the key driver in the long run.

“The ECB is about getting back to zero, while the Fed can hike four or five times and start balance sheet reduction and keep going,” he said in an interview with Bloomberg Television Thursday. “That means euro, over time, is still biased lower, even if it moves sideways in the short term.”