Major Wall Street banks are anticipating a significant decline in the euro, with expectations that it could reach parity with the US dollar. This forecast comes as geopolitical tensions in the Middle East threaten to increase Europe's imported energy costs, and concerns over higher borrowing costs weigh on the eurozone's economic prospects.
Leading financial institutions, including JPMorgan and Citibank, have revised their outlooks for the euro, anticipating it could reach $1 against the US dollar within the coming months.
JPMorgan has downgraded its euro forecast to $1 by the year-end, while Citibank is even more pessimistic, targeting parity with the dollar "within six months." Citibank cited its long-held view of an impending European recession, which it believes will occur ahead of a similar downturn in the United States.
These projections place the US banking giants at the forefront of a growing number of financial institutions foreseeing further declines in the euro's value, which has already fallen by approximately 6% against the dollar since mid-July. The unexpected strength of the US economy has propelled the dollar higher, while concerns of a looming recession in Germany, traditionally the eurozone's growth engine, have put downward pressure on the euro.
Meera Chandan, co-head of the global FX strategy research team at JPMorgan, noted that despite the recent decline, the euro has not yet factored in the multiple uncertainties it currently faces, including tighter financial conditions and potential geopolitical risks, all amid stagnant growth.
Yasmin Younes, a strategist at Citi, stated that the US dollar's strength can be attributed to "US exceptionalism," emphasising that the Federal Reserve's rate cuts priced in for next year are incongruous with a tightening labor market.
Recent economic data paints a grim picture for Europe, with the German government revising its growth forecast downwards, anticipating a 0.4% contraction this year. Additionally, the International Monetary Fund (IMF) expects Germany to be the worst-performing major advanced economy in 2023.
Should the euro reach parity with the US dollar, it would return to levels not seen since the second half of the previous year, when it dipped below $1 for the first time since 2002 due to disruptions caused by the war in Ukraine and Europe's gas supply.
The ongoing Israel-Hamas conflict has also added to Europe's economic challenges by driving up energy prices. Benchmark European gas futures have surged by 26% since Hamas's attack on Israel on October 7.
Analysts at Goldman Sachs have expressed a bearish outlook for the euro, fueled by concerns over Italy's larger-than-expected budget deficit and disappointing economic activity over the summer. Bond investors' anxieties over Italian government bonds have further exacerbated the situation.
The spread between yields on benchmark Italian debt and German bonds breached 2.01 percentage points on Monday, potentially increasing pressure on the European Central Bank (ECB) to either halt interest rate hikes or initiate rate cuts. The governor of Spain's central bank suggested that the recent turmoil in global debt markets might be enough to control inflation, indicating a possible change in the ECB's policy direction.
Currency speculators have also been unwinding their bullish positions on the euro in recent weeks, with net long positions falling significantly. While some banks still anticipate a strengthening of the euro by year-end, several, including Rabobank, Nomura, and RBC Capital Markets, have adjusted their forecasts, expecting the euro to reach $1.02 by the end of the year or early in 2024.
Jane Foley, head of FX strategy at Rabobank, believes that parity is increasingly possible and may become a prominent topic of discussion in the coming months as Europe faces numerous economic challenges independent of broader market trends.
