Euro / Dollar Parity Still Unlikely, But Not Impossible say Analysts

"Simply put, a EURUSD much lower than the current level would be very low" - DNB Markets.

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The Euro could reach parity against the Dollar, but only if the war in Ukraine escalates significantly and oil and gas supplies from Russia cease say analysts.

The predictions come as chatter of the Euro to Dollar exchange rate reaching 1.0, or going below, rises in the wake of the pair's rapid decline below 1.10 amidst the fallout caused by the war in Ukraine.

The exchange rate fell to 1.0806 on Monday March 08 amidst another bout of investor nerves linked to the war, however the single currency has clawed back some lost ground by the time of writing on Tuesday.

"The USD continues to benefit from deteriorating risk appetite and investors’ search for ‘safe havens’. Since risk sentiment started to decline in earnest amid the escalation of the situation in Ukraine, the EURUSD had fallen from 1.1468 on 14 February to 1.0920 at the end of last week, i.e. by c3.5%," says Ingvild Borgen, Markets Analyst at DNB Bank ASA.

Most of the EUR/USD's drop happened last week, when it slid 2.9%

The war has pressured Eurozone gas prices higher while sending global oil prices surging, leading investors to reduce bets the European Central Bank will hike interest rates more than once in 2022.

Rising oil and gas prices will squeeze consumers in the Eurozone and inevitably slow growth, creating a state of stagflation and complicating the European Central Bank's planned shift towards raising interest rates.

"The further negative evolution of the Russia-Ukraine conflict is making the risk more tangible of a stronger unfavourable fallout on the euro area economy," says economist Asmara Jamaleh at Intesa Sanpaolo.

Above: EUR/USD at daily intervals.

• EUR/USD reference rates at publication:
  Spot: 1.0830
• High street bank rates (indicative band): 1.0502-1.0578
• Payment specialist rates (indicative band): 1.0785-1.0830
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The Italian bank estimates the the conflict could subtract around 0.7-0.8% from Eurozone growth this year and the next, while boosting inflation by as much as 2.0%.

Their GDP growth forecast this year is revised down from 3.9% to 3.1% amidst "a significant upward revision" of inflation from 3.7% to 5.4%.

"The resulting delay in the ECB’s monetary policy normalisation process... represents the other key factor to revise down our forecasts for the euro and, beyond the near term, may become the decisive variable," says Jamaleh.

DNB's Borgen says while Euro-Dollar's recent decline is linked to demand for the 'safe haven' Dollar it is also due to adjustments in interest rate expectations in the U.S. and eurozone, with expectations falling faster and further in the latter.

"Our view of a further widening in USD-EUR interest rate spreads and continued ‘safe-haven’ demand for the USD led us to lower our 3-month forecast for the EURUSD from 1.12 to 1.08," says Borgen.

Borgen says EUR/USD has never traded below 1.00 (apart from around the time of its launch) and in the 20 years since launch it has traded at 1.05 only very briefly (in 2015 and 2016).

The Euro-Dollar therefore looks structurally opposed to valuations closer to 1.0.

"Simply put, a EURUSD much lower than the current level would be very low," says Borgen.

The U.S. is considered to be more insulated from the war in Ukraine but the DNB analyst warns that should the war continue to hit Eurozone growth the U.S. economy would eventually start to feel the pinch.

"Put differently, there is a limit to how wide USD-EUR interest rate spreads could go, in our view. Due to this, we will not adjust down our forecast further," says Borgen.

Above: EUR/USD fell below 1.0 close to the time of its launch but has since settled comfortably higher.

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DNB Markets do not rule out a further drop in the EUR/USD in the immediate term, "but in the event do not believe levels much below 1.08 would be sustained".

"We have revised down our forecasts for the EUR/USD exchange rate," says Intesa Sanpaolo's Jamaleh.

His new forecasts for Euro-Dollar are 1.06, 1.09, 1.12, 1.18 and 1.23 on a 1m, 3m, 6m, 12m and 24m horizon, revised down from 1.10, 1.12, 1.17, 1.20 and 1.24.

Euro weakness is forecast to be front loaded into coming weeks and the 1.06 lower bound is build on the 'pandemic panic' lows reached in 2020.

But, the Euro could go lower says Jamaleh. "The risk is that the exchange rate may temporarily drop below these levels".

"We must reassert the high level of uncertainty in making forecasts in times of war. Should the conflict escalate dramatically and at length, and/or gas supplies be interrupted or reduced, the euro would depreciate more strongly, to around parity," he adds.

But in the event of a more favourable evolution of the war/crisis, "the euro’s correction would be blander, and its subsequent recovery swifter".