Hedge funds are betting against the euro on the prospect of the ECB boosting its easy-money policy at its gathering next month.
Speculators increased their bets on the euro’s decline to their highest level in almost three months, according to positioning data up to August 13 from the US Commodity Futures Trading Commission.
The euro is also facing political headwinds with Italy’s government looking close to unravelling, and the UK seemingly headed for a crash-out exit from the EU in just over two months.
Markets are bracing for the ECB to loosen policy even further on September 12, to prop up the eurozone’s faltering economy.
“Despite the softer data, the easing regime-shift by the ECB is not yet fully reflected in positioning or valuations,” said strategists at JP Morgan.
“ECB dovishness and weak growth are still the main drivers of our bearish euro stance. Italian politics are an incremental negative in the near term.”
The euro was little changed at $1.1109, after falling 1% last week. JP Morgan strategists now see the euro slipping to $1.10 by September and trading at that level into the end of the year, lower than their earlier end-2019 call of $1.13.
Against sterling, the euro gained slightly to 91.43 pence.
It comes as Germany’s central bank warned that Europe’s largest economy could be about to tip into recession, adding to the pressure on the ECB and the German government to ramp up support.
The Bundesbank said in its monthly report that German output will remain “lacklustre” in the third quarter and “could continue to fall slightly”.
That would be a second straight quarter of contraction — the typical definition of a recession — after a 0.1% decline in the April-June period.
The prognosis follows weeks of worse-than-expected German data and meagre corporate earnings reports. That has dragged down the rest of the eurozone and prompted the ECB to consider extra monetary stimulus.
The German government has also signalled that it might be willing to step up spending, should the crisis worsen.
The Bundesbank cited persistently weak momentum in industry as a reason for the continued weakness, and said it is unclear whether domestic demand might take a hit as well.
“Future developments will hinge on how long the present economic dichotomy lasts and which direction it takes once it dissolves,” the Bundesbank said.
“As things currently stand, it is unclear whether exports and, by extension, industry will regain their footing before the domestic economy becomes more severely affected.”
The Bundesbank added that the slowdown observed over the last year has already impacted the labour market, with employment rising at a “considerably slower” pace in the second quarter. Wage growth was also “noticeably smaller”.
The German government is getting ready to act, preparing fiscal stimulus measures that could be triggered by a deep recession, Bloomberg reported.
The programme would be designed to bolster the domestic economy and consumer spending to prevent large-scale unemployment.
Similar to bonuses granted in the 2009 crisis to prod Germans to buy new cars, the government is studying incentives to improve the energy efficiency of homes, promote short-term hiring, and boost social welfare.