EUR/USD Breaks Down: A Conviction Call for Further Declines

The EUR/USD currency pair has broken down from its two-year trading range, driven by softer-than-expected eurozone PMI numbers. This move is expected to continue, with a lower EUR/USD remaining a conviction call. The European Central Bank (ECB) is likely to cut interest rates again to support the eurozone economy, which will further widen the US-eurozone rate differential.

The escalation of the Russia-Ukraine war has also added to the euro’s downside, with European natural gas prices creeping higher. While some may argue that the EUR/USD has come a long way already and that the dollar normally weakens in December, these factors are unlikely to reverse the current trend.

The EUR/USD is now undervalued based on medium-term models, but this does not preclude a move to parity. The next support zone is at 1.0190/0200, and investors may not be as short EUR/USD as they had hoped after downside barriers have been triggered.

The EUR/USD currency pair has experienced unusually narrow trading ranges over the past two years, deviating from its typical behavior, and the advent of Trump 2.0 may usher in a period of higher volatility. The EUR/USD FX options market is taking note, with one-year traded volatility up to the highest levels since October.

Given the heavy macro/geopolitical factors favouring the downside, it is likely that the EUR/USD will continue to decline. Investors should not stand in the way of a move to parity, and higher traded volatility levels are expected to persist.

Key Levels:

Support: 1.0190/0200
Resistance: 1.0448 (2023 low)
Forecast:

EUR/USD to move to parity

Higher traded volatility levels expected to persist
Recommendation:

Sell EUR/USD on rallies

Buy EUR/USD puts to hedge against further declines