Synopsis: MUFG discusses the near-term pressures on EUR/USD, highlighting its recent dip below this year's previous low. Despite the bearish pressure, MUFG doesn't anticipate the pair to fall past the symbolic parity point. They identify specific potential triggers that might push the dollar even stronger against the euro but remain cautious about the dollar's capacity for a sustained rally.
Current Dynamics of EUR/USD:
- The EUR/USD spot rate has descended below 1.0484, marking the lowest for the year so far.
- This downward trajectory suggests that EUR/USD could be moving nearer to the parity level, a one-to-one ratio of the euro to the dollar.
Factors Limiting a Breach of Parity:
- MUFG believes that for EUR/USD to drop below parity, a significant event or series of events would have to occur. They list a few potential triggers:
- Market disruptions in China.
- A sudden and severe lack of U.S. dollar liquidity.
- The U.S. Federal Reserve contemplating multiple hikes, beyond what is currently anticipated.
- The emergence of a particularly cold winter in Europe, which can have economic implications.
Dollar's Potential for a Sustained Rally:
- MUFG opines that the prospects for a prolonged dollar surge are limited.
- In terms of Real Effective Exchange Rate (REER), the dollar's peak towards the end of the previous year exceeded the high from 2002 and reached levels that had not been observed since the final quarter of 1985.
- The rapid corrective movement of the dollar in the fourth quarter of the previous year demonstrates the extent of its overvaluation.
- Given this, MUFG remains wary of any substantial return to such peaks but is cognizant of the potential risks mentioned earlier, which could catalyze further dollar gains.
Closing Thoughts: MUFG's perspective suggests caution in interpreting the recent bearish movement of the EUR/USD pair. Despite some downward momentum, they see significant barriers to it reaching parity and believe the dollar's potential for a sustained rally is somewhat restricted. However, they remain alert to global events that could introduce volatility to this dynamic.