06:30 AM EST, 01/03/2025 (MT Newswires) -- EUR/USD has dropped considerably since the end of September -- nearly 10 "big figures" or around 9% -- suggesting a lot of the bad news related to the policies of incoming United States President-elect Donald Trump are well priced, said KUFG.

There has been no rally, or a squeeze of short euro (EUR) positions into year-end that often is what you see which suggests positioning isn't yet stretched and the renewed selling on Thursday with EUR/USD down over 1.0% highlighting the fact that appetite remains strong and that tariffs and divergence expectations between the US and the eurozone could fuel further EUR/USD selling over the coming weeks and potentially months, stated the bank.

A lot will depend on what comes over the next few weeks and in particular around Trump's inauguration on Jan. 20, wrote MUFG in a note to clients. While there have been limited signs of overstretched positioning through the turn of the year, any sense that Trump won't first focus on trade would likely see quite a notable reversal of US dollar (USD) strength -- in a circumstance of trade tariffs not being announced on day one or in a day or two after would potentially see EUR/USD recover to around the 1.0500 level.

The bank still sees this scenario as unlikely and expects Trump to follow through on his word and act "quickly."

Tax cuts via the extension of the Tax Cuts and Jobs Act of 2017 is another key plank of expectations of divergence in economic performance between the US and the eurozone, added MUFG. For this to happen, Trump needs near-on 100% support from Republicans in the House given the slim Republican majority of 219 to 215.

Friday Congress will convene for the first time and its first task will be to select the House Speaker. Trump has thrown his support behind Mike Johnson and he is the favorite to win. But one Republican has vowed to vote against meaning just one further Republican vote against would leave the vote tied and create problems. Still, the vote Friday will underline how tight the House majority is and potential issues for Trump going forward.

But for the US dollar this month it will be all about trade tariffs which Trump can implement independently of Congress. The bank expects day-one announcements on China, Mexico, Canada and possibly Vietnam. Other countries will be hit quickly with investors sensing an aggressive approach that will likely boost the US dollar further.

Given the lack of year-end US dollar selling, a breach of parity in EUR/USD now looks likely with US dollar strength persisting over the coming months as Trump at least meets market expectations with a risk of surpassing expectations initially, according to MUFG.