Analysts at companies like Nomura International Plc, Rabobank, and ING Groep NV have reduced their expectations to little under $1 in the previous two weeks alone. Google searches for the term “parity” have increased, and a Bloomberg options model predicts that the euro will likely reach that level by the beginning of next year.
US yields, which are sharply rising and supporting the currency, are a major factor in the doom. However, there are also significant domestic variables in play. The biggest economies in the eurozone are still experiencing sluggish growth, concerns about Italy’s excessive government debt are resurfacing, and inflation worries are reappearing as a result of rising oil prices.
“It will be difficult for the euro to avoid parity,” said Jordan Rochester, an FX analyst at Nomura, if oil prices go over $110 per barrel. According to “US rates,” the euro should already be worth $1.01 to $1.03.
On Friday, the price of the currency hovered at $1.06. Rochester recently reduced his prediction for the euro’s value to $1.02 by year’s end from $1.06.
Europe was in disarray when the euro dropped to $1.00 last year, the first time in more than 20 years. The region’s gas supply was being disrupted by the recent outbreak of hostilities in Ukraine. Investors were concerned that once the European Central Bank started its tightening campaign, higher interest rates would push Italy’s indebted government over the brink.
Although a lot has happened since then, the euro’s decline demonstrates how grim the situation still is, particularly now that the economy is experiencing higher borrowing costs. Since reaching a top of $1.13 in July, the common currency has decreased by nearly 6%.
Read more: Previously Unthinkable Bond Yields Have Become the Markets’ New Normal.
Because of that, some people may find it painful to wager on a decline to parity. Andreas Koenig, head of global FX at Amundi, claims that a large portion of the gloom is already incorporated into the price of the euro.
Naturally, it’s a possibility, but I don’t believe parity will occur this time, according to Koenig, who anticipates the euro returning to $1.07 by the year’s end. “I believe that everything is now valued at more than one dollar.”
Analysts currently also seem pessimistic. By the end of the year, the euro is expected to rise to $1.08, according to the median projection in a Bloomberg survey.
However, the likelihood of inflation increases the longer the euro is weak. Although the ECB doesn’t have a specific currency target, it normally monitors the foreign exchange market because of the potential influence on consumer prices.
The mainstream expectation that the dollar will strengthen in the next months should keep euro bearish on their toes. The common currency must develop a new narrative if it is to decline much deeper towards the levels last seen almost a year ago, even if many negatives have already been included into current prices.
Even if parity is not achieved, the likelihood of such an occurrence is rising, indicating that the euro does not have a good chance. According to Stephen Jen, CEO of Eurizon SLJ Capital, the current weakness in the economies of China and Europe combined with robust US economic growth would likely result in continuing dollar strength and euro depreciation.
According to Michael Metcalfe, global head of macro strategy at State Street Global Markets, investors are still eager to increase their underweight euro positions.