The move down in EUR/USD has continued and the last week fall been driven by increased Russia-Ukraine tensions, weaker November German and Eurozone PMIs, and our view of option barriers being hit (the next major barrier is around 1.0250). As a result, EUR/USD has broken through the key support level of 1.0450, reaching its lowest point since 1 December 2022. The market has marked the EUR down sharply for the following reasons. Europe’s economy is weak; its large bilateral surplus with the US makes it a target of Trump’s trade agenda; it does not have many fiscal options; productivity growth is sluggish and European Central Bank (ECB) policy rate cuts are the easiest path to stimulus. With the below estimates Nov PMIs, ECB might go for a 50-bps cut in Dec meeting itself. In our 19th Oct opinion piece titled “ECB might cut by 50 bps in Dec meeting” we had seen this possibility arising. Last week's Euro’s sharp drop to a two-year low versus the dollar cleared up options orderbooks, in one of the biggest positioning washouts in recent history. It’s now hard to tell how the market will react as interbank traders say orderbooks are thin, while around 80% of downside barriers exposure has been triggered and delta-hedging is pretty much done. The narrative remains bearish the Euro and interest for parity exposure may pick up. Thought there might be risks to our EUR bearish view via 1) position reduction ahead of the Thanksgiving Day holiday; 2) EUR/USD's historical outperformance in December (with a 78% success rate since 2010); and 3) potential easing of geopolitical tensions in Eastern Europe; we believe EUR is headed towards parity sooner than later, so Euro becomes a sell on rise FX till 1.06 is not breached on a weekly closing basis.
