Monex Europe: EURUSD parity isn’t impossible, it’s just unlikely

Monex Europe: EURUSD parity isn’t impossible, it’s just unlikely

23 oktober 2023

Valuta
Geld dollar euro (03)

For FX markets, the growing risk that the eurozone slips into recession in the fourth quarter has led to renewed calls of EURUSD falling to and potentially breaking parity in the upcoming six months.

In the light of the upcoming ECB meeting, Monex Europe discusses the questions in its latest WeekAhead publication (see attached) if the calls for EURUSD to go parity are realistic.

'With the ECB now declaring a likely end to their tightening cycle and Chinese data showing signs of improvement, there have been some questions as to whether this would lead to a bottoming in eurozone activity. While we agree that this will ultimately play out, we think the lagged transmission of previous actions, the effective tightening of financial conditions since September’s decision, and the recent uptick in oil prices are likely to maintain pressure on growth conditions, means an improvement is unlikely to become visible until early next year. Even so, our projections for a eurozone recession in the fourth quarter only sees EURUSD falling to 1.03, as the downturn in growth will likely have little impact on eurozone yields and should correspond with softer US growth', Simon Harvey, Head of FX Analysis at Monex Europe, writes.

Therefore, Monex Europe thinks another negative growth shock will likely need to materialise for EURUSD to grind towards parity and potentially break it. Monex Europe writes that energy markets pose the most likely near-term risk but that also the eurozone bond markets could unlock a decline to parity. While EURUSD parity isn’t impossible, Monex Europe considers it as unlikely.

'With European energy markets in a relatively better position than 2022, especially natural gas markets, and bonds still someway off levels needed to warrant concerns over financial stability and rate cuts, it isn’t surprising to see EURUSD trade above 1.05 even as investment banks like JP Morgan and Citi release forecasts of parity. While we expect deteriorating growth data to weigh on EURUSD from here, likely triggered by this week’s flash PMIs and a bleak economic assessment by the ECB, we don’t see this as sufficient to force EURUSD down to parity in the near-term. This view is also shared by options markets, where the implied probability of EURUSD touching parity by year-end sits at just 14% and a break below priced at just 6%', Harvey explains.

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