What Euro Shorts Say About a Fed Rate Move

Investors are trimming their bets that the dollar is going to rise against the euro ahead of one of the most closely watched Federal Reserve announcements of all times.

As "Fed week" gets underway, the latest data released by the U.S. Commodities Futures Trading Commission show that so-called short trades on the euro against the dollar, investment strategies which benefit as the euro falls, are at their lowest levels in almost two years.

Investors significantly cut their euro short trades in the week to September 8. Even if the number only represents a part of the market, it represents a good proxy for the broader investors’ sentiment.

Now it might seem counterintuitive that investors are taking bets against the euro off just as Fed liftoff could trigger a rally in the dollar, with investment flows attracted back to the U.S, at the expense of the euro.

But the move suggests there are still big uncertainties abou what Fed officials will do with rates this week.

Investors are making sure their funds are ready to weather any outcome from the meeting, as the euro could move in either direction against the dollar depending on the Fed's moves. A significant Fed delay could temporarily strengthen the euro as markets remain exposed to a longer period of uncertainty. The euro has recently acted as a safe haven against uncertainty.

Uncertainty also means running little risk in their currency strategies, by reducing a staggering short position built on the single currency in the past months.

“This suggests that the market’s appetite for holding long dollar positioning is currently very low,” says James Hellawell, quantitative strategist at BNP Paribas. He added that this provides scope for investors to re-enter the familiar sell the euro buy the dollar trade as soon as uncertainty over the path of U.S. rates is cleared.

Total short positions on the euro peaked to just below $50 billion in the first part of the year, as the dollar rallied against the euro.

The euro fell as low as 1.05 against the dollar in March, but it has since defied forecasts that it would fall closer to parity and regained ground to trade around $1.17 in August, as it picked up a role as a safe haven currency for investors.