EUR/USD: 3 reasons to target euro-dollar parity! (Deutsche Bank)

Deutsche Bank believes that the current bearish reversal of the EUR/USD on the forex suggests a move towards parity.

"We have been structurally bearish on the EUR/USD for a while but we have lowered our confidence level this year as the Fed became dovish and the ECB no longer had any easing options. Trump's victory has changed things.

We are now more confident that the EUR/USD will break its 1.05-1.15 range and move towards parity next year, for 3 reasons:

1- The EUR/USD pair remained without a trend for a long time and began to move again. The duration of the current lack of trend is approaching a record (Figure 1). When the EUR/USD last broke such a long range, the pair moved 10% in a few weeks.

2- The USD is approaching the levels of the top 3 G10 currencies with a high yield. Large USD moves don't depend very much on changes in short-term rates, but absolute levels instead: when the USD enters into the top 3 G10 currencies with high yields, it rises strongly while flows in search of profits return. A Fed rate hike in December would make the USD the world's third high-yielding currency, a bullish argument on the forex (Figure 2).

3- Divergence is back. Even before Trump, the risk to US growth was rising. More fiscal easing and regulation would add bullish expectations to both growth and the Fed. In the meantime, European risks are rising, due to a deterioration in credit supply and political prospects. The recent rise in real rates in the euro area increases the chances of a more dovish ECB.

Our forecasts for the EUR/USD are 1.05 and 0.95 by the end of 2016 and 2017, respectively."