EUR/USD: Parity Ahead In Q1 '17

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The more implicit hawkish message from the Fed stands to benefit the greenback against the rest of the major currencies. The shift in the dots sent the hawkish message while Yellen failed to back peddle this message in the presser. We also note that Yellen poured cold water on the notion of letting the economy overheat, suggesting policy will remain sensitive to the closure of the output gap. Importantly, we think this backdrop broadly reinforces the broader uptrend in the USD. We expect the EUR to lead the broader region lower now that the ECB assumed a more dovish footing earlier this month.

The break of the recent low near 1.046 opens up a new range and a test of parity over the course of H117.

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The Euro-Dollar Rate: Critical Break-Down Point Confirmed


The Euro is under intense pressure against the Dollar following the suddent realisation that the US Federal Reserve could raise interest rates three times in 2017.

The EUR/USD fell to 14 year lows on the back of sustained US Dollar demand - not even a sharp rise in German yields could steady the shared currency.

The prospect of higher higher yield in the United States has attracted strong inflows of capital from investors which has in turn bid the Dollar higher.

Contrast this scenario to that of the Eurozone where interest rates remain anchored in negative territory and where the European Central Bank threatens further stimulus by way of its Asset Purchase Programme.

This divergence in policy is the fundamental driver of a weaker Euro and on this basis there appears scant reason to bet on any meaningful recovery in EUR/USD.

“The ECB has already decided to extend its QE programme and has therefore turned even more dovish. Thus, the growing divergence of monetary policy stances between the US and Eurozone should keep the pressure on the EUR/USD exchange rate," says Fawad Razaqzada of Forex.com.

EUR/USD is in a strong downtrend with the break below the 1.0503 December 5 lows confirming an extension down to the next target at the 1.0467 March lows, which has since been met.

"EUR/USD has eroded the 1.0467 March low and more importantly closed below here. This represents a critical break down point and we would ideally like to see a weekly close below here," says Karen Jones, a technical strategist with Commerzbank in London.

Jones does however note the 13 counts on the daily chart and the fact that the daily RSI has not confirmed the new low and we may see some consolidation around this zone.

"We look for this to struggle on moves to the 1.0660/80 band and previous lows circa 1.0505/18 will offer initial resistance," says Jones.

Beyond here markets will be targeting 1.00.


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