Dollar Rebound to Press EURUSD Back to Parity this Year: Capital Economics

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The Euro to Dollar exchange rate (EURUSD) is on course to test parity again according to analysis from Capital Economics.

The independent research and consultancy provider says although most G10 currencies have risen against the greenback in June, a number of factors continue to favour the Dollar.

"Dollar strength can be chalked up to changes in yield gaps, with US yields generally rising more than those elsewhere as investors re-embrace the 'higher for longer' story," says James Reilley, Assistant Economist at Capital Economics.

The shift in interest rate expectations favours the dollar, primarily due to the relative resilience of U.S. activity data compared to other major economies such as the eurozone and China.

Capital Economics maintains its view that growth in the U.S. and other major economies will eventually disappoint, leading to safe-haven demand and further strengthening of the dollar.

"We don’t think a 'soft landing' would necessarily be dollar negative either," says Reilley.

But the Euro is also tipped to underperform amidst signs Eurozone inflation has peaked.

"Eurozone May inflation data came in well below expectation, suggesting price pressures are finally starting to ease there," says Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics.

Eurozone CPI inflation fell back to 6.1% in May, down from 7% in April, making for the lowest level since February 2022 and below the 6.3% forecast by economists in a Reuters poll.

The inflation figures indicate a potential decline in the euro's strength, suggests Capital Economics.

Despite the European Central Bank (ECB) likely proceeding with rate hikes this summer, Goltermann believes the upside risks to interest rates in the eurozone have diminished owing to recent inflation dynamics.

"While the ECB still looks likely to press ahead with at least one, and probably two, more rate hikes this summer, the upside risks to interest rates in the euro-zone have diminished. This makes us more comfortable with our forecast that the euro will drop back towards parity with the dollar later this year," says Goltermann.