Despite Rallying the Euro Dollar Exchange Rate Still Forecast to Hit Parity in 2015

The euro to exchange rate conversion has gained rapidly in June but the longer-term downtrend should ultimately prevail confirm institutional analysts.

The euro dollar exchange rate (EURUSD) has delivered another 1% in mid-week trade thanks to constructive headlines flowing out of Europe which have taken the pair back above the key 1.12 level.

The big news for the euro has been the press conference delivered by ECB President Mario Draghi following the bank’s latest policy decision meeting.

“What markets focused on was the fact that Draghi seemed to condone the fixed-income sell-off over the last few weeks, adding that the Governing Council was unanimous in the need to look through these developments. Global central banks seem to be comfortable so far with this repricing in rates, so markets are continuing to push yields higher,” notes Jacqui Douglas at TD Securities.

For the euro it is interest rate yields that matter once more - as yields rise so does the exchange rate.

The euro to dollar exchange rate is seen at 1.1269 at the time of writing.

Greece Progress

Greece is the other factor to watch for the shared currency, good news here is certainly a positive for sentiment. The country seemingly took a step toward securing badly needed rescue money as Athens submitted a new proposal to its creditors who are also showing a renewed intent to resolve the crisis.

"The euro would not have experienced such a strong rally if not for the prospect of a deal between Greece and its creditors being announced as early as Wednesday.  According to key officials, the EU and IMF have reached an initial agreement that would unlock additional bailout funds for Greece," says Kathy Lien at BK Asset Management.

That said, an official deal may not be announced until the end of the month with more back and forth between now until then. Unless more progress is made every day, which is unlikely, the euro may find it difficult to extend its gains before an official agreement is made.

“The market's propensity to respond to Greek debt developments has been fickle at best since February, but with the June 5 IMF payment deadline looming, we'd expect the Euro to remain relatively more sensitive to headlines regarding the southeastern European nation of 11 million,” says Christopher Vecchio, Currency Analyst, at DailyFX.

The dollar outperformed on Monday the 1st of June after stronger than expected manufacturing data offered evidence of an economy digging its way out of a first quarter hole. America’s jobs report on Friday is considered highly critical to the dollar’s coming prospects, this data should confirm whether the current euro dollar rally has the potential to extend further.

Longer-Term Weakness Still Forecast

Markets are meanwhile accused of being overly generous to the euro by Deutsche Bank, the world’s largest foreign currency dealer. Analysts at the German bank reckon a fall to an exchange rate of 1:1 against the dollar will still occur.

In their latest FX Pulse release DB say:

“We remain EUR/USD bears and continue to look for a move down to at least parity by the end of the year: positioning is cleaner, the squeeze has reached the upper limits of those seen during prior downtrends, and both relative central bank and growth expectations are too skewed in favor of Europe vs the US.

“Beyond that, the underlying euro portfolio flow picture remains very negative, while EUR/USD has historically demonstrated one of the highest sensitivities to Fed rate hikes. There is more to life than the euro, however, and we also recommend a long USD trade-weighted basket. Even very modest upcoming Fed tightening should promote the dollar to the rank of a G10 FX high-yielder, historically a major marker of dollar strength.”

In the longer-term, the symmetrical triangle from 2010-2014 favours further weakness towards parity.

As a result, we join those who view the recent sideways moves as a pause in an underlying declining trend.