(News Bulletin 247) – Quoted by the Financial Times, the banks Citi and JPMorgan estimate that the euro zone currency could soon find itself at parity with the greenback, which has benefited from the rise in interest rates and the ‘aversion to risk. Bank of America sees the euro at around $1.05 at the end of the year.

The hopes of the beginning of the year have been dashed. While several research offices at that time forecast a euro at $1.10 or even above for the second part of 2023, the euro zone currency was unable to resist the strength of the king dollar.

Since a peak at $1.1277 reached in July, the European currency has fallen by 6.5% against the greenback and is also falling by 1.5% over the whole of 2023, currently standing at $1.054.

As is often the case in currency markets, this trajectory deviation can be explained at least in part by monetary policy. If the European Central Bank sent a message during its last monetary policy meeting quite clearly that the key rate increases were now complete, this is much less clear for the American Federal Reserve (Fed). Market projections show that investors are still opening the door to a rate hike from the US central bank.

“Second, US GDP growth has held up much better than expected and compared to other countries, although there are signs of slowing,” adds UBS.

The rise in geopolitical tensions, with the war between Israel and Hamas, has also led to a purchasing movement towards safe haven values. However, the dollar, thanks to its role as a currency used for international transactions, fully benefits from this status as a safe haven.

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

Too much uncertainty about the euro?

Can the trend accelerate to the point where the dollar rises and reaches parity with the euro (i.e. 1 dollar would be equal to 1 euro), as in the summer of 2022?

In any case, this is what the banks Citi and JPMorgan seem to think, both cited by the Financial Times. JPMorgan estimates the euro will fall to one dollar by the end of this year, compared to $1.05 in its previous forecast. For the bank’s strategist, the euro zone currency does not incorporate a sufficient discount to reflect the uncertainties surrounding it.

Among these uncertainties are “tight financial conditions” and “potential risks of geopolitical spillovers, all of which occur in a context of stagnant growth,” she explains in a note cited by the Financial Times.

Citibank, for its part, declares that it is aiming for parity over a “six-month horizon” because it is counting on a recession in Europe which would occur well before that in the United States.

A much stronger euro next year?

Obviously not all banks share this forecast. UBS sees the euro reaching $1.06 at the end of December before rising to $1.08 in March then $1.10 in June and 1.12 in September 2024.

But the Swiss bank recognizes that in the short term “the euro-dollar is likely to be in a narrow range, with short-term risks tilted to the downside between 1.00 and 1.05.”

Bank of America is on a similar trajectory, counting on the euro to be around $1.05 at the end of this year and then at $1.15 at the end of next year.

However, “we see potential for further upside in the dollar if the soft landing (of the economy, editor’s note) coincides with the outperformance of US growth, while a possible hard landing could also support the dollar if volatility reappeared”, judged the American bank at the end of September.