Is the EUR/USD parity really possible in 2024?

12 April 2024 - 13:00

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There is once again talk of a possible parity of the EUR/USD in 2024: why don’t analysts rule out such a heavy slide in the community currency?

Is the EUR/USD parity really possible in 2024?

The EUR/USD remained just above 1.0850 in European trading on April 9th, without any particular upheavals.

Forex analysts, however, have already opened a debate on what could happen to the euro dollar given a potential divergence between the ECB and the Fed in monetary policy choices in the future. The topic that has been exciting observers for days concerns precisely the possibility that the Eurotower will act first in cutting rates, pressured by declining inflation and rather fragile economic growth. On the contrary, the USA continues to record solid macro data, with resilience in both the job market and the manufacturing sectors that can still ignite inflation.

The most likely near-term scenario for the pair is for the trading range to remain narrow and for investors to avoid large bets ahead of upcoming data and critical events. In addition to US inflation, we will have Fed minutes and ECB meeting on Thursday, where perhaps no change in rates is expected, but President Lagarde’s comments could lead to new conclusions.

Meanwhile, some observers are once again talking about parity in the EUR/USD pair.

EUR/USD towards parity? What analysts say

The currency scenario of parity between the euro and the dollar is back among those possible in the medium-long term according to an analysis conducted by Bloomberg.

Bank of America Corp. and Germany’s LBBW, for example, have assessed a series of extreme risks and warned of future euro weakness if bets on the different pace of rate cuts by the ECB and the Federal Reserve they will materialize.

Geoffrey Yu, senior strategist at the Bank of New York Mellon, said that the euro could reach parity with the dollar this year and did not rule out a cut by the ECB as early as its meeting on Thursday 11 April.

For now, none of the strategists interviewed by Bloomberg have a baseline forecast of parity. Any decline would require a slip of about 8% to the levels last seen in Europe’s deep crisis after the Russian invasion of Ukraine.

However, few are willing to ignore the possibility of such an evolution. If the Fed keeps rates steady while the ECB cuts them, parity is possible according to Moritz Kraemer, chief economist at LBBW. The bank predicts that the euro will slide to $1.01 in 2025: the forecast is the most bearish among those compiled by Bloomberg.

Strategists led by Athanasios Vamvakidis at BofA are evaluating scenarios in which the euro returns to parity against the greenback if the Fed stops borrowing costs at high levels this year and the Eurotower cuts three-quarters of a point. The euro could even fall further in the event of a new energy shock, they said.

Any further cuts made by the ECB relative to the Fed can trigger a 1% move in the euro-dollar exchange rate, according to Samuel Zief, head of global FX strategy at JP Morgan Private Bank.

But options markets imply only about a 15% chance of the euro falling big enough to bring it to parity from current levels over the next 12 months. Flows into options since the March central bank meeting suggest little belief that the euro could weaken far below the $1.05 psychological support level.

Euro-dollar parity partisans are back in vogue,” said Audrey Childe-Freeman, chief G-10 currency strategist at Bloomberg Intelligence. “While we are not among them, our forecast range of $1.10-$1.15 and outlook for euro strength in 2024 strongly necessitate a weakening of US data, of a more moderate US inflation trend and a certain recovery in the euro area economy.”

These expectations, which are not easy to satisfy, could therefore be disappointing and weaken the EUR/USD in the coming months.

Original article published on Italy 2024-04-09 11:09:27. Original title: Euro dollaro, la parità è davvero possibile nel 2024?

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