Euro / Dollar Parity Still on Say Bank of America

Bank of America Merrill Lynch have upgraded their forecast for the euro to dollar exchange rate while downgrading their call on the dollar to yen pair.

At the end of 2015 analysts at Bank of America Merrill Lynch were almost universally bullish the dollar, and the running joke was, “even the bears are bullish”.

In a little over two months, however, that has all changed, and now there is barely a bull still standing.

Bank of America – who had forecast that EUR/USD would cross parity and fall to 0.95 – have updated their forecasts and tell clients they are now expecting the pair to only fall to 1.00.

“On the back of our economists change to 2 from 3 Fed hikes this year, the addition of a significant risk episode of US QE and our equity strategists revised forecasts, we now expect: EURUSD to end the year at 1.00,” the bank said.

They also substantially revised down their outlook for USD/JPY, now expecting a drop to 110.00 from a previous forecast of 120.00.

“This year feels different,” they remark, “investors are dealing with multiple shocks: RMB (Renminbi) weakness early in the year and accelerating loss of PBOC reserves; the negative response of equities to the sharp drop in oil prices; the sell-off in credit markets; the further sell-off in EM; the sell-off in European banks; a toxic US data mix, with manufacturing in recession but wages rising; and Eurozone data losing momentum. 

“On top of this central bank efficacy is being called to the question: JPY and EUR are stronger despite recent easing by the ECB and BOJ - and there's more ECB easing ahead.”

But, Euro / Dollar Exchange Rate Could End Year Even Higher

Looking ahead, BofA sees upside risks to their forecasts for the EUR/USD conversion to end the year at 1.00.

The BofA note characterizes the US economy as somewhere between a ‘rock and a hard place’:

“At this point, deteriorating US data can make things worse, while a turnaround would hinge on developments beyond the US - China, oil and EM in particular.

“Better US data, while calming recessionary fears, may stoke the ripple effects of a rising USD again, such as by triggering more capital outflow from China.”

They go onto quote revisions by their U.S analysts which are even more bearish for the dollar:

“Indeed, in the risk scenario that our US economists are considering, we would expect EUR/USD above 1.15, USD/JPY at 100 and US 10y at 1.4%.”

March Will be Key for the Euro

The outlook for the euro ultimately lies with just how agressively the European Central Bank (ECB) is when it comes to the policy measures they announce at their June meeting.

Policy-makers will be desperate to ensure the euro stays as weak as possible to help stimulate economic growth.

"The euro slipped further from last week’s four-month highs, shedding three cents in the process. The minutes from the ECB’s January meeting came out today and served as a potential stage-setter for strong stimulus as soon as bankers’ next meeting on March 10," says Joe Manimbo, analyst with Western Union.

The minutes flagged greater risks to the 19-country economy from global turmoil and weak oil prices.

A reminder of the bloc’s weak fundamental shape, coupled with a tentative recovery in risk sentiment, has worked against the euro, capping its upside