Investing.com – Citi Research has turned increasingly bearish on risk, and recommends selling any rallies.

At 07:00 ET (11:00 GMT), EUR/USD traded 0.1% higher at $1.0926, having dropped around 0.3% over the course of the last week.

The U.S. bank flagged last month that it was turning bearish on risk, citing that volatility tends to mechanically move higher into the U.S. election, as well as concerns that the U.S. was heading into recession. The nonfarm payrolls print accelerated this view as the markets repriced the probability of a hard landing. 

This initially drove safe haven FX to outperform and catalyzed unwinds in crowded carry positions. This past week witnessed a reversal as higher beta FX (AUD, CAD, NOK, NZD) outperformed and lower yielders (JPY, CHF) lagged.

Citi asserts G10 FX will continue trading to risk sentiment. 

“Markets have reached an inflection point where the trading environment has become increasingly tactical and the catalyst focus has shifted from inflation to the labor market and growth,” Citi analysts said, in a note, dated Aug. 12.  

“The latter suggests that U.S. retail sales and initial claims will matter more for the risk backdrop than U.S. CPI next week,” Citi added. “Greater clarity should appear in the coming weeks.”

Citi has revised its Fed call and expects 125 basis points in cuts through the year-end With markets pricing ~100 bps in cuts over this window, this creates asymmetric dovish repricing until further signs of stabilization emerge. 

“Here we stress that dovish repricing on non-linear labor market weakness (USD+) is not the same as dovish repricing on disinflation confirmation (USD-). USD has arguably underperformed during this latest bout of risk-off, but we stay bullish and like selling any EURUSD rallies back towards 1.10.”