Parity
As we brought to you earlier this week, there is an increasing chatter in the market about whether EURUSD has the momentum to challenge parity once again. At face value, of course, this would create a meaningful value change in the world’s foremost currency pair which has already seen a significant exodus of value so far this year. But more than this, at such a key time for macroeconomic transition, it could create a degree of endogeneity and start to contribute to the very dynamics driving the market lower. To examine whether EURUSD could shift back towards parity, let’s take a look at how it took place last time and compare market dynamics then to now.
The last time we saw one US Dollar trade at higher spot value than one Euro was in mid 2022. In Q2 2022, EURUSD swap rates priced a higher short term premium for the US Dollar over the Euro than we see today. That is one first initial vote against a return to parity. However, there are two key factors to consider before discrediting a return to parity based on this alone. Firstly, as we have discussed recently the market is less fixated on and driven by interest rate differentials than it has previously been. Secondly, interest rate differentials are shifting rapidly and swap rates could easily catch up to similar levels.
With the Euro already weak, rising oil prices amidst growing tension in the Middle East is having a greater impact upon the Eurozone than it is the US. Whilst this might support the case for limiting interest rate cuts, recent opinion from ECB policy makers regarding growth reveals a Bank prepared to cut rates. Even the Bank’s own inflation forecasts project a rate of inflation below target within a reasonable horizon. Despite the challenges present, the overall impact on the Eurozone’s terms of trade leaves the Euro better positioned than it was during the turmoil of 2022. Whilst not impossible, parity would be far less sustainable or logical for EURUSD than it was two years ago.
Discussion and Analysis by Charles Porter
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