EUR/USD parity in sight as bears smell blood

<p>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 […]</p>

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.

16-11-18-eurusd-monthly

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.