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EUR/USD breaks down to new 2016 low as dollar extends strength

In the midst of a Trump-driven rally in US equities and the dollar, and a corresponding rise in US interest rates as bond markets sell-off, the EUR/USD currency pair has broken down to new lows. Expectations of higher interest rates have been fueled by anticipation that President-elect Donald Trump will follow-through on his campaign promises of substantially greater spending on infrastructure and comprehensive tax cuts, which should result in significantly higher inflation. In turn, this places upward pressure on interest rates and the dollar.

Since the dollar’s initial knee-jerk plunge during last week’s election, the greenback has rallied sharply with little rest, due in large part to these interest rate expectations. As a result, two of the most traded currency pairs – EUR/USD and USD/JPY – have made some dramatic shifts. As for EUR/USD, the strength in the dollar has been coupled with a lagging euro pressured by ongoing expectations that the European Central Bank will extend its substantial quantitative easing program.

For the time being, though, EUR/USD has been driven down since last week mostly by the surging dollar, which is expected to remain strong in the near-term as the new Trump Administration prepares to take office and the Federal Reserve prepares to deliver its interest rate decision in December. As it currently stands after Trump’s election victory, the probability of the Fed raising rates in December has risen even further, with the Fed Fund futures market now pricing-in around an 85% likelihood of an impending rate hike.

The dollar’s unrelenting strength of late has prompted EUR/USD to breakdown below its previous downside support target at 1.0800 to hit a new year-to-date low just above the 1.0700 handle as of Monday. With any further interest-rate-driven support for the US dollar, EUR/USD is likely to follow-through on this highly significant breakdown to target a major downside support objective around the key 1.0500 level.

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