(Bloomberg) -- Asset managers have slashed their bets on gains in the euro to the lowest in more than a year, as markets factor in the risk that the European Central Bank will move before the Federal Reserve in cutting interest rates this year.
Positioning data from the Commodity Futures Trading Commission for the week through Feb. 20 showed that institutional investors cut back their long positions in the single currency to the least since November 2022. These positions have been decreasing steadily over the past five weeks.
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The move comes as money markets are betting the ECB will start cutting rates in June, a month before the Fed, as inflation pressures ease faster in the euro zone than in the US. Before the year is out, they see just under a full percentage point of ECB easing, compared to 82 basis points from the Fed.
While the euro has picked up in recent weeks to trade around $1.0850, it remains down 1.7% this year against a broadly stronger dollar. Flows tracked by State Street Corp. show “heavy selling” in the euro by institutional investors over the past week or so. The bank said those investors have been selling euros against most Group-of-10 currencies, aside from the lowest-yielding ones.
“The only euro pairs where we've seen significant euro buying are franc and yen over the past week,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “That would seem to suggest that the euro is being used as a funding trade.”
Institutional investors have been slashing euro long positions after building them to all-time highs last year, according to the CFTC data. Options markets are in favor of dollar gains over the next year, though sentiment in so-called risk reversals show the least bearish sentiment on the euro since May.
--With assistance from Vassilis Karamanis.
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