EUR/USD: The End of EUR Strength, Parity Finally on Cards

The euro to dollar exchange rate conversion (EURUSD) will fall to parity in 2015 and below the 1:1 level in 2016.

This is the view of Barclays who have confirmed a weaker euro as being their core view in global FX.

Barclays have held this view for much of 2015 but have conceded that the recent weakness seen in the USD has caught them by surprise.

Nevertheless, new forecasts released in their publication Global FX Quarterly, show the bank maintaining the view that the trajectory for euro dollar is lower.

The news comes as we move through a key period for Greece that could well see the country's exit from the Eurozone.

“A resolution to the Greek situation may pose near-term upside risks to our EURUSD forecast and weigh heavily on the CHF. As such, we think selling the CHF against the EUR is an appropriate hedge,” says Wynne offering a strategic solution to the risks imposed on any active speculation against the euro.

With a referendum being announced for early July we see the risks of a Greece exit from the Eurozone being firmly on the cards and the door being opened on a lower euro.

We also heard from Goldman Sachs last week that they are factoring in a 1:1 exchange rate between the dollar and euro based on the assumption that no sustainable deal will be reached on Greece.

Meanwhile, the pro-euro impact of the German bund sell-off witnessed in April/May will however wane and in the process remove further obstacles to any declines.

“The euro area faces significant headwinds, and the EUR downtrend remains in place. On the flipside, we see risks that US rates may not be pricing enough tightening,” says analyst Jose Wynne at Barclays in New York.

The dollar has seen a protracted pause in strength, but the markets has been accused of over-exaggerating the sell-off we have seen.

Barclays believe markets will have to re-price the dollar at higher levels as the prospect of a September interest rate hike at the US Federal Reserve becomes clearer.

“The pause in the USD rally has lasted longer than we expected, but we still forecast the greenback to outperform. We think the policy divergence theme remains firmly in place, and although we believe the bund selloff increases EUR sensitivity to euro area uncertainty, we see short EURUSD as among the best positions to hold. We continue to expect EURUSD to trade through parity in early 2016,” says Wynne.

Economics Improve Supporting the Dollar

Driving the USD side of the story is the improving US economy which continues to recover from its early 2015 blip.

“Although the US consumer seems to be saving more of the oil windfall than our models had anticipated, and inflation has been slightly weaker, data have broadly met our expectation that the US economy is on a firm path to outperformance,” Barclays have told clients.

As such the markets may be under-pricing an interest rate rise.

Barclays still expect the Fed to hike twice this year, starting September, a view that they believe the market has been slowly coming around to since the beginning of this year but that we think remains under-priced.

“Short EURUSD remains our flagship recommendation and still our favoured way to express USD strength. We think it is far too early for the ECB to be comfortable with the selloff in German bunds, given the fragile recovery in growth and inflation. Policy divergence should continue to drive EURUSD lower, and we expect it to move lower in line with the EA-US real interest rate differentials,” says Wynne.

By September Barclays are projecting the euro dollar exchange rate to reach 1.07 before hitting parity at the end of the year.

A fall below parity occurs in 2016 with EURUSD seen at 0.98 at the end of March and 0.95 by the end of June.