EUR USD parity in sight as bears smell blood

As the week draws to a close, the EUR/USD is still limping, now below 1.06. It could absolutely collapse next week as the dollar appreciates further. The market seems convinced that the Fed will hike interest rates in December and tighten its belt further in 2017. Meanwhile the ECB and other major central banks are widely expected to maintain their current extremely loose policy stances intact well into 2017 at the very least. As such, the dollar is getting stronger across the board, but especially against currencies where the central bank is still uber-dovish such as the euro.

This basic fundamental view has kept the EUR/USD below 1.15 for nearly two years after the unit had collapsed from the highs of near 1.40 in June 2014. The lack of a significant bounce from around the 1.05 handle points to a break down. After a lengthy two-year consolidation the follow-up selling pressure could likewise be lengthy in duration. It will also draw the attention of momentum-chasing traders who have had little success in this pair since 2014. Thus, a collapse to parity or even lower in the coming weeks is definitely possible.

To get anywhere near parity, the EUR/USD will first need to break and then hold below the prior support around the 1.0460/1.0525 area. As things stand, this looks like a good possibility for the reasons stated above. However, as always, it is worth remembering that the markets are forward-looking. As such, the outlook for the diverging monetary policy stances in the Eurozone and US may already be priced in, if not fully then may be partially. But price needs to confirm this view by creating a distinct reversal pattern. Until and unless such a technical signal is generated, the path of least resistance remains to the downside.