Feb 27 (Reuters) - It's wise to hedge the risk that EUR/USD has dropped into lower range but also the potential that the pair has resumed its longer-term decline, which could result in a drop to a multi-year low.

For almost two years EUR/USD traded tight ranges within 1.0448-1.1276 extremes but mostly within 1.05-1.10. This was a consolidation of the plunge from 1.2349 in January 2021 to 0.9528 in September 2022 that resulted from the U.S. tightening cycle. This consolidation is the foundation for a drop.

Changing interest rate differentials between the eurozone and United States are undermining the pair which has dropped from the upper extreme of the prior consolidation phase to a point far below it.

This year's base at 1.0125 is deep below the lowest point traded in the prior two years at 1.0448. At the very least, this decisive break should lead to lower ranges, with the upside likely close to the floor of the prior range around 1.0500. But this could also be the start of a much deeper decline, in keeping with the long-term trend.

Following the global financial crisis EUR/USD has fallen substantially from above 1.60 toward parity. The eurozone crisis was the trigger for a plunge from 1.20-1.40 ranges, to 1.0000-1.2000.

Overcrowded investment in the dollar largely made the brief plunge below the base of the 1.00-1.20 range unsustainable, culminating in the rise to 1.1276 in 2023.

Without the restraint of that cumbersome investment in the greenback, it has begun to rise swiftly. There's good cause to hedge for lower ranges and also a fairly significant risk that should EUR/USD fall below parity it may struggle to regain it. Parity could become the peak of a new medium-term range
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)