Parity forecast for EUR/USD in 2016
28/Jan/2016 • Currency Updates•
Our Chief Risk Officer and Bloomberg forecaster Enrique Diaz-Alvarez expects the Euro to reach parity with the US Dollar some time in the second quarter of 2016. In the forecast table for these two currencies, we see the Euro trading at 1.02 in this quarter and around 0.99 by the second quarter of 2016. There are two main driving forces behind this forecast:
1. The expectation of gradually rising interest rates in the US
In our recent G10 report (available for download below) we note that:
‘Given the strength of the US economy, and in particular its labour market[…], we continue to expect the Fed to hike rates at a pace of roughly once a quarter. This should keep the US Dollar well supported against all of its G10 peers.’
Hiking US interest rates once per quarter is a faster pace than the market is currently pricing in, but can be reasonably deduced from a median calculation of the December FOMC ‘dot plot’ chart, below.
December FOMC Dot Plot
Source: Federal Reserve Date: 16/12/2015
2. The real possibility that ECB easing measures are extended in the coming months
It bears noting that the ECB, unlike the Federal Reserve, has a mandate that focuses exclusively on inflation. The continued deflationary pressures in the Eurozone, exacerbated by a lack of wage pressure and the collapse in commodity prices, is very worrisome news for President Draghi.
Eurozone Inflation Rate (2012 – 2015)
Source: Thomson Reuters Datastream Date: 12/01/2016
If Eurozone inflation fails to show a significant uptrend, we ‘expect the aggressive monetary easing from the Governing Council to drive the Euro lower against the US Dollar, towards parity at some point in the second quarter of 2016.’
Download our G10 report for access to Enrique’s full EUR/USD forecast table and insight into all the major currencies and their economies…