Investing.com — They suffered a crisis on Wednesday as Donald Trump’s decisive election victory and the likely prospect of a red sweep are expected to extend the era of American economic exceptionalism and push the dollar higher.
EUR/USD fell 1.7% to 1.0741 on Wednesday.
“EUR/USD should break through 1.05 and head towards parity if the end result is a red sweep as long as US resilience persists,” JPMorgan analysts said in a recent note.
The analysts had previously estimated that a Republican sweep could lead to a broad USD strengthening of as much as 7% in the broad index, potentially pushing EUR/USD towards 1.00-1.02.
Republicans regained control of the Senate by winning three seats in the elections, and optimism is growing that they may also retain control of the House of Representatives. A red sweep could provide newly elected President Donald Trump with a clear legislative path to implement his policies.
Trump’s proposed policies, including tariffs and fiscal policies, will be the main transmission channels for the global currency of the US elections. It is now more likely that both factors will come into play, the analysts said.
However, the path to parity for the EUR/USD may not be easy, the analysts added, citing a lack of visibility on the timing of any US policies, possible reactions from other countries and the evolution of US economic data.
Any sentiment shock from Trump’s expected policy actions will likely force the European Central Bank to cut its final interest rate to cushion the blow, putting further pressure on the single currency.
“Unlike China, where fiscal policy is likely to be activated, dependence on eurozone monetary policy could further weaken the euro,” they said.
JPMorgan’s call for continued dollar strength has historical precedent. During previous periods of trade uncertainty in 2018 and 2019, the USD outperformed due to a combination of exceptional US growth rates and the negative global slowdown due to trade uncertainty.
The analysts also recommended going short again as the pair is less sensitive to US yields, even if the Swiss National Bank will retreat against a stronger franc.
The only caveat to the brief reliance on the euro is a potential decline in U.S. yields, which could offset some of the euro’s weakness, the analysts said.
