Macro headwinds are building up for long EURUSD positions in addition to signs that
EURUSD is becoming very overbought technically. A few weeks ago we noted that EURUSD
sentiment was one of the most bullish (contrarian indicator) among the 50 major FX pairs
we track. This bullishness is causing EURUSD to diverge from real-rate
differentials.

The right chart below shows volatility-adjusted 2-year real-rate differentials between EUR
and USD. We can see that higher eurozone inflation is helping to drive real-rate differentials
lower, removing a support for EURUSD.

The left chart shows the spread between eurozone inflation surprises and US inflation
surprises. We can see that historically high relative eurozone inflation surprises have led to
a weaker EUR, as higher inflation tends to result in lower real rates of carry available in EUR.
We continue to maintain a tactically cautious stance towards EURUSD.

                             Source: Bloomberg, Macrobond and Variant Perception