FxWirePro medium term outlook: Euro may go for a test of parity against dollar

The referendum vote in the United Kingdom is not likely to hurt the country alone, it is at the very least will hurt the European Union as well. Other than economic shocks, the European Union may suffer political cracks as well in countries which are already part of monetary unions. A similar referendum is quite likely in France and Netherlands, two of the founding members of the Union as well as core members of the European Monetary Union (EMU).

In addition to the above threat, there is a strong possibility that European Central Bank (ECB) will have to stay put over monetary policy much longer than assumed before the referendum even if the bank doesn’t go for further easing.

The Euro zone is going to face three major elections next year in France, Germany, and Netherlands. In two countries there are strong possibilities that Euro-skeptics may come to power and the other one in Germany may see the end of the Merkel era.

With such clouds of uncertainties hanging over, we don’t expect the euro to outperform the dollar, instead, it may very well drop at least 1000 pips from the current price of 1.116 and go for a test of parity against the dollar. We prefer the stop loss for the trade to be around 1.16 area or at least 1.15 area.