EUR/USD: A Double Blow: Finally Heading To Test Parity

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USD: US dollar bull market regains upward momentum.

The US dollar rally has accelerated after the dollar index clearly broke above key resistance yesterday from the previous cyclical high at around 101.5 recorded in December of last year. It brings an end to the period of consolidation which has been in place since March of last year.

We would not be surprised to see at least another 5 to 10% upside for the US dollar heading into the middle of next year as the bull market has embarked on the another leg higher. In the first and second stages of the US dollar’s advance, the dollar index increased by around 14% between September 2011 and July 2012, and by around 25% between July 2014 and March 2015. One potential constraint which could help to dampen further upside is that the US dollar is already very overvalued according to our longterm valuation model estimates.

EUR: greater focus on political developments in Europe

The election of President Trump has delivered a double blow to the EUR/USD rate sending it on the way towards a test of parity. Further evidence of a rise in antiestablishment sentiment amongst the US public has heightened concerns over political risk in Europe in the year ahead. The upcoming constitutional referendum in Italy is very much in the market’s focus now. The global bond sell off is reinforcing the sell-off in the Italian government bond market ahead of the referendum. The yield spread between the 10-year Italian and German government bonds has widened sharply by around 0.6 percent since the summer to just over 1.8% reaching its widest level since May 2014.


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