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EURUSD: Parity a far-off dream, expect 1.05 by 2016 – SocGen

FXStreet (Delhi) – Research Team at Societe Generale, note that not only is the probability of Fed lift-off by year-end now below 50% in our view, but the pace and extent of the entire rate-hiking cycle is likely to be more meagre which implies that EUR/USD will likely not now reach parity unless there is another dramatic ECB policy move.

Key Quotes

“After falling by nearly 20% over Q4 14 and Q1 15, the euro has clawed back more than a third of the losses in the last seven months. Part of that is due to the huge shift in US rate expectations as forecasts of the timing and scale of the Fed’s tightening cycle have been scaled back.”

“Part of it is also down to a recovery in the euro area’s economy, as well as much reduced concerns about the Greek debt crisis. The euro’s performance has also tended in recent quarters to correlate negatively with global risk sentiment, i.e. rallying when global markets are in turmoil. That’s a significant change that reflects its role, along with the yen and US dollar, as a funding currency especially with ultra-loose ECB policy driving a search for yield among European investors.”

“The ECB will in due course extend QE, but it would take a more aggressive policy move to really undermine the euro independently. That’s possible if the global growth outlook deteriorates further, but more likely is a dull patch for the European economy with modest growth and marginal monetary easing. We expect EUR/USD to slide gradually back down to 1.05 by the end of 2016.”

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