By the end of this week, the European currency managed to win back the previous losses. Taking advantage of the greenback's short-term weakness, the single currency partially restored what was lost. Against this background, there was renewed talk among investors about the possible parity of EUR and USD
According to Samuel Zief, Head of Global FX Strategy at JP Morgan Private Bank, the movement of key currencies to parity is a long way. In order to achieve parity between EUR and USD, it will be necessary to "reduce expectations of growth of the European economy compared to the American one." Currently, the euro looks "incredibly cheap", but the situation may change dramatically. Zief allows a 180-degree reversal in the dynamics of the European currency.
According to JP Morgan's currency strategist, the dynamics of the dollar plays an important role in the possible parity of EUR and USD. In the medium-term planning horizon, namely in the next two years, the USD value takes into account a sharp increase in the Federal Reserve's interest rate and a consistent tightening of the monetary policy. Stephen Gallo, head of currency strategy at BMO Capital Markets, agrees. He noted that the dynamics of the EUR/USD pair is influenced not only by the prospect of a significant divergence in the monetary strategies of the Fed and the European Central Bank, but also by the movement of capital. The expert draws attention to the "evolution of the main flows of the euro balance of payments". This situation is complicated by the risk of "negative shocks in the field of energy supply, which pull the euro to the bottom."
According to analysts, the consequence of parity between the euro and the dollar will be the "political inertia" of the ECB, expressed in the rejection of interest rate changes. According to preliminary calculations, the inertial movement of the central bank will cover the summer period. There are possible options in the fall, but many analysts do not expect the ECB to make drastic changes regarding the rate hike. This situation introduces a certain imbalance in the expectations of the market. Currently, the euro is growing, focusing on the upcoming tightening of the ECB's monetary policy, but at any moment the central bank may abandon the chosen course. According to experts, the ECB's political inertia will continue, "if the central bank is faced with the worst of combinations – an increased risk of recession in Germany and a sharp rise in prices, which will further push the eurozone economy to stagnation."
In such a situation, the Fed will take the reins, especially if the EUR/USD pair goes to the 0.9800-1.0200 range. The implementation of such a scenario will lead to a strengthening of the dollar against the euro. Against this background, the Fed is able to suspend or slow down the tightening cycle of the monetary policy. According to George Saravelos, head of global research at Deutsche Bank, at the moment the economy "is at a stage where a noticeable deterioration in financial conditions undermines expectations of tightening by the Fed." At the same time, Deutsche Bank analysts still consider the American currency to be the most expensive in the world.
However, despite positive expectations regarding the medium- and long-term prospects of the greenback, the latter has sharply lost its position. By the end of this week, the dynamics of USD became the worst one since February of this year. Having demonstrated growth over the past 14 weeks, the dollar has felt a kind of "fatigue" and has significantly sunk against other currencies. According to Deutsche Bank analysts, since the dollar exchange rate is still too high, the EUR/USD pair will return to the 1.1000 mark in the coming months, and not to parity, as previously predicted.
Currently, the pair is far from "parity", but at any moment the situation may change. The EUR/USD pair was cruising near 1.0592 this morning, confidently moving to new peaks. According to experts, when the psychologically important level of 1.0350 is surpassed, the question of testing parity will arise again.
Some analysts believe that in the medium term, the euro will sink even lower than it is now. At the same time, the recent hawkish shift in the ECB's policy will not be able to compensate for the increase in inflation expectations in the eurozone recorded earlier this year. According to Westpac economists, the current hawkish statements by ECB representatives and a not too tough position on energy sanctions against the Russian Federation neutralize the downward pressure on the EUR. At the moment, the markets are pricing in four ECB rate hikes by the end of 2022. At the same time, the central bank allows its rise by 50 bps, paving the way for further rejection of the policy of negative rates (NIRP).
Taking into account the strengthening of inflationary expectations, which contribute to a massive outflow of capital into safe haven currencies, the dollar retains its growth potential. Against this background, analysts expect the euro to weaken further against the greenback, as well as the Fed to complete the cycle of tightening interest rates.
