Will EUR/USD hit parity this year?

Where the consensus outlook in the beginning of December for EUR/USD at the end of 2015 was at 1,18 it is currently just below 1,09.
In just 1,5 month most banks were quick to lower their forecasts, adjusting them to the major events taking place. In the run up to the ECB meeting of 22 January it became clear that a decision to go ahead with QE was already a certainty. The ensuing downward pressure on the Euro forced the SNB to throw in the towel and abandon the cap on the Swiss Franc. This and the announcement of bigger than expected QE by the ECB brought spot EUR/USD to as low as 1,1098. Since then, EUR/USD has recovered to around 1,13 as the FOMC remained “patient” on the back of poor December durable goods orders and still lacklustre wage growth. Now that the ECB has played its trump card the prospect for EUR/USD is again dependant on expectations for the Fed to hike rates.

ING, who was nominated best FX forecaster for 2014 by Bloomberg, is still very bearish on EUR/USD. Last Monday it has updated its forecast for Dec ’15 to parity and for Dec ’16 to 0,90. ING thinks “the market continues to under-price the first Fed funds rate hike as well as the potential more aggressive pace of the tightening cycle. We are looking for the Fed to start the tightening cycle around mid 2015, fuelling a further EUR/USD decline at a time when short-end EZ rates are set to remain grounded”
Rabo is less bearish and sees EUR/USD at 1,10 at the end of this year. They cite a moderate 1,7% y/y December rise in hourly earnings and constrained inflationary pressure with core CPI at 1,6% y/y. It may not be a surprise that they currently don’t expect a rate hike before the end of this year.
CIBC also forecasts EUR/USD at 1,10 at the end of this year, after a low of 1,07 in the third quarter, and rising further to 1,23 at the end of 2016. They expect a first rate hike in June this year as “the pace of the labour market’s improvements will see wages heat up enough by then to reassure the FOMC that core CPI will indeed head to its 2,0% target over time. That timeline is a bit quicker than is currently being priced in, which will see the dollar outperform most majors through at least the first half of this year.”

Three banks, three different views. And to add an argument which is not specifically mentioned by neither of them. The impact on the bond market of the QE program by the ECB might quite well be bigger than when the Fed started its program. According to Nordea (see: Bonds: Who can satisfy the appetite of this elephant?) the ECB is set to buy an amount almost three times this year’s net issuance (around half of gross issuance), coming at a time when there are structural reasons for banks to hold government bonds, such as regulatory demands and falling net issuance volumes. Obviously, this will impact interest rate differentials by driving down EZ yields further, and as such impact EUR/USD as well.

Follow me