EUR/USD: Dipping Or Taking A Deep Dive?

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The US policy mix suggests that more Fed hikes have to be priced. With lasting policy uncertainty and potential protectionism, there are probably enough ingredients to consider the risk of massive new dollar appreciation. If the negative political surprises don’t stop there and have a far more dramatic impact on Europe, the euro could fall much more.

The recent price action (Treasuries, Dollar Index, EUR/USD) is seriously challenging longterm patterns and is boosting the case for EUR/USD breaking parity.

The recent price action is seriously challenging long-term patterns. The UST sell-off involves the important break at 2.00% of the resistance line on the 5.20% double top starting in mid- 2007, when the credit crunch started (Graph 2). Predicting the end of the 2007-2016 market era would be extremely premature and imprudent, even on the back of the recent priceshaking US election. However, there is room for higher yields within a 25-year long bearish channel (Graph 2), with room for yields to increase up to the fair value stated above.

In FX markets, the price action for the Dollar Index and EUR/USD seem pivotal. Below 1.07, EUR/USD is testing a major trendline starting from the 2000-2001 lows and accurately capturing the three increasing bottoms of 2015-2016 (Graph 4). These bottoms correspond to a horizontal triple top of the Dollar Index just above the psychological 100 level, above which there is an air pocket (Graph 3).

This implies that a slightly lower euro would not break a twoyear range but a 15-year trend and that the Dollar Index (the euro weighs 57.6%) would break free in the 100-120 region. EUR/USD may therefore not stop at the recent 1.05 low but could break parity.


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