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Analysis of the world's most comprehensive dataset on how investors are positioned on foreign exchange markets suggests the Euro could be on track to test parity with the Dollar once more.

"We think positions can continue to trend more bearish, with the euro likely to weaken further," says Bilal Hafeez, Head of Research at Macro Hive.

Hafeez has looked at the latest positioning data on option strikes from the CME Group and finds it "suggests a possible return to parity, with strong demand for put options until at least 1.03."

The findings indicate the market is increasingly of the view that levels below 1.03 are possible as traders with options set to 1.03 will only start to realise profit once the Euro to Dollar exchange rate moves below here.

"There is notable net demand for EUR/USD puts from 1.07 until 1.03," says Hafeez. "This means investors need EUR/USD to trade below at least those levels to register a return on their put options."

The Euro reached parity against the Dollar last year but rebounded through the first half of 2023 driven by improved Eurozone growth dynamics linked partly to lower energy prices.

However, a renewed economic slowdown in the region compares unfavourably to the robust outperformance of the U.S. economy, which has already sent Euro-Dollar down some 5% in H2.

"European growth has lagged that of the U.S., helping markets reprice expectations for both the European Central Bank and Federal Reserve – unfavourably for the euro," says Hafeez.

Energy is back on the agenda with the rise in both oil and gas prices; "with Europe a net importer of energy and the U.S. a net exporter, the euro found another reason to tumble," says the analyst.

Breaking down market positioning reveals hedge funds closed 24.8k long positions and opened an additional 5.5k short positions over the past month, taking them net short on the euro by 23.3k futures contracts.

"No other currency has seen a larger bearish revision over the period," says Hafeez.

Asset managers have also revised their long positions on the Euro, although they retain a net-long position (359k).

"We are pessimistic on the euro," says Hafeez. "The U.S. has much stronger growth than Europe, with few signs of convergence. The U.S. dollar has a positive carry story over the euro, which we expect to continue through 2024."

High energy prices are a positive for the energy-rich U.S. economy. Further Dollar support comes as U.S. investors remain reluctant to buy foreign bonds, which had previously weighed on the U.S. dollar, explains Hafeez.

"We think the euro may well continue to underperform the U.S. dollar, with another visit to parity possible," he adds.