Euro slump to continue as Trump victory, likely 'red wave' to add steel to dollar

Investing.com -- The euro suffered a meltdown against the dollar on Wednesday as Donald Trump's decisive election victory and the likely prospect of a 'red sweep' are expected to extend the era U.S. economic exceptionalism and push the greenback higher. 

EUR/USD fell 1.7% to 1.0741 on Wednesday.

"EUR/USD should trade through 1.05 and head towards parity if the eventual result is a red sweep, so long as US resiliency holds," analysts from JPMorgan said in a recent note.

The analysts had previously estimated that a Republican sweep could lead to broad USD strengthening by as much as 7% in the broad index, potentially pushing EUR/USD towards 1.00-1.02.

epublicans regained control of the Senate by gaining three seats in the elections, and there is growing optimism that they may also retain control of the House of Representatives. A 'red sweep' could give President-elect Donald Trump a clear legislative path to enact his policies.    

Trump's proposed policies including tariffs and fiscal policy will be the main transmission channels for global FX from the U.S. elections. Both factors are now more likely to come into play, the analysts said.

The path toward parity for the EUR/USD, however, may not be straightforward, the analysts added, citing a lack of visibility on the timing of any U.S. policies, potential responses from other countries, and the evolution of U.S. economic data.

Any sentiment shock from Trump's expected policy measures will likely force the European Central Bank to lower its terminal rate to cushion the blow, further pressuring the single currency. 

"Unlike China, where fiscal policy is likely to be activated, the Eurozone's reliance on monetary policy could further weaken the euro," they said.

JPMorgan's call for ongoing dollar strength has historical precedent. During previous periods of trade uncertainty in 2018 and 2019, the USD outperformed due to a combination of U.S. growth exceptionalism and negative global growth drag from trade uncertainty.

The analysts also recommended re-entering EUR/CHF shorts outright, as the pair is less sensitive to US rates pricing, even though the Swiss National Bank will pushback against a franc strength.

The one caveat to the short call on the euro is a potential fall in U.S. rates, which could offset some of the euro weakness, the analysts said.

Source: Investing.com