EUR/USD Rate Forecasts Cut to Parity by Danske Bank

Image © European Central Bank

Danske Bank are the latest major financial institution to predict the Euro to Dollar exchange rate will fall to parity.

The Scandinavian lender and investment bank have announced they are cutting their forecasts for the Euro, saying Eurozone and global economic growth will fall over the coming months, reducing the attractiveness of the single currency and further boosting an ascendent U.S. Dollar.

"Over the coming months, growth is set to be lower than it otherwise could have been, given continued elevated input costs and the manufacturing sector is likely to slow substantially," says Lars Merklin, Senior Analyst, at Danske Bank.

He says the U.S. stands out as a relative winner in this environment owing to its large sectors in energy, agriculture and defence.

But inflation is running hot in both the Eurozone and U.S. economies with central banks expected to tighten monetary conditions in response.

Danske Bank expects the Federal Reserve to deliver "substantial rate hikes" and sell bonds back to the market in a process of quantitative tightening.

"ECB will equally seek to raise rates, though moderately – starting mid-summer. In our view, this is set to substantially tighten financial conditions and is intended to ensure inflation peaks out over the year of 2022 and we have already seen that risk-seeking behaviour is being curtailed on the back of these coordinated CB efforts," says Merklin.

But the U.S. should nevertheless continue to be a higher interest rate market for international investors.

Danske Bank's modelling now estimates Euro-Dollar fair value to be at 1.0.

Above image: Macrobond Financial, Danske Bank.

"We view fair value for EUR/USD to be around 1.00, depending on the model employed," says Merklin. "We thus now shift the forecast from 1.05 on 12M to 1.00." (Set your FX rate alert here).

Pound Sterling Live reported midweek that Wall Street Bank JP Morgan had announced they were cutting their Euro-Dollar forecast to parity.

"EUR/USD is now expected to test parity for the first time in 20 years," says Meera Chandan, FX Strategist at JP Morgan in London.

The Wall Street bank's updated views on EUR/USD largely relies on the belief the U.S. Dollar is not done appreciating.

Specifically, JP Morgan argues macro economic conditions in the past month have become even more conducive to their bullish USD view.

"The growth slowdown has broadened with even the US not immune and China spillovers to the rest of the world are a risk, with the Eurozone more vulnerable," says Chandan.

Danske Bank says the key risk to their view that the Euro will par the Dollar would be the fading of global inflation pressures and an increase in global production.

Under such an outcome EUR/USD could recover towards 1.15.

"The upside risk also include a renewed focus on easing Chinese credit policy and a global capex uptick but neither appear to be materialising, at present," says Merklin.