EUR-USD Exchange Rate Losses Forecast to End at Parity

A new euro to dollar exchange rate forecast suggests that the shared currency could see losses finally end at around parity.

Analysts at BMO Capital have suggested that weakness in the EUR-USD will continue until at least parity is achieved.

If the analysis is correct and parity does prove to be the ultimate support zone then the trajectory from current levels will be shallower than it has been heading into the start of 2015.

At the present time the EUR-USD is trading at 1.0599 having seen key support zones arrest further USD advances.

[Note that all FX quotes in this piece reference the wholesale markets rates - your bank will affix a discretionary spread to this wholesale rate to derive their profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances, learn more here.]

In a quarterly forecast note to clients, BMO say they expect EURUSD to trade at 1.05 in 3m and 1.03 in 6m.

The ultimate driver to the pro-USD thesis is that the US central bank is preparing to raise its core interest rates, something that should attract currency seeking better yields.

The first such rise is tipped to come in September by BMO Capital.

The ECB and Federal Reserve’s balance sheets are headed in opposite directions with the ECB introducing a policy of quantitative easing to try and boost the Eurozone economy.

This flood of money has the effect of pushing the currency lower.

As the Fed tightens its own balance sheet we can see how divergence will aid the USD against the EUR.

“ECB QE is keeping yields suppressed and the average duration of its purchases will likely increase as shorter-term rates approach the deposit rate (-20bp), QE will cap the EUR even in the face of stronger Eurozone data,” says the BMOC note.

Analysts expect the euro dollar exchange rate to stabilise around 1.00.

The only caveat here is that Greece exits the Eurozone and/or the Fed hikes rates by a greater amount than 25bps before the end of this year, in which case declines could extend beyond parity.

However, the shared currency could continue to find support as foreign investors buy Eurozone stocks and other assets that are set to benefit from the ECB’s quantitative easing programme.

“Reserve interest in the EUR and capital inflows are not disappearing entirely due to the wider current account surplus, rally in asset prices, and the ‘announcement effect’ of QE which has boosted cyclical indicators,” confirm BMO.

Investors are also said to be selling EURs forward to hedge their EUR exposures and swapping EUR assets into USD, but these downward impacts on the EUR are partially offset by the wider current account surplus.