By Sarupya Ganguly
BENGALURU (Reuters) – A retreating euro will remain weak in the short term, caught between political turmoil in France and expected new U.S. rates early next year that boost the dollar’s appeal, a Reuters poll of market strategists shows.
While there seemed virtually no prospect of a speedy recovery, most strategists were nevertheless convinced that the euro would not reach parity with the US dollar over the next three months, especially as much of the bad news has already been priced in.
With the French government likely to collapse later on Wednesday after far-right and left-wing parties tabled motions of no-confidence against Prime Minister Michel Barnier, the euro has virtually no chance of recovering any of the nearly 6% losses suffered since late September. .
Concerns about eurozone growth, along with stronger prospects for more rate cuts from the European Central Bank in coming months, pushed the common currency to a two-year low of $1.03 in late November.
Interest rate futures factor in more than 1.5 percentage points more interest rate cuts by the ECB by the end of 2025, twice the amount forecast for the US Federal Reserve, where expectations of renewed domestic inflation risks have receded.
Average forecasts from nearly 70 currency strategists in a Dec. 2-3 Reuters poll on the euro, currently trading around $1.05, showed it would be there in three months and about 1% lower at $1 .04 in six months, significantly lower than $1.10 and $1.11 in November. questionnaire.
“There are several reasons why the euro is vulnerable, which are strongly linked to structural and political issues facing both France and Germany. A pressing question is whether these problems will be limited to France or whether there will be a contamination element,” said Jane. Foley, head of FX strategy at Rabobank.
“Germany also seems to be in the background and is currently struggling with stagflation – a problem that the country has not been able to shake off – which is not a good sign for the euro.”
NO PARITY YET WITH THE US DOLLAR
Yet only a handful of strategists in their given forecasts predicted that the euro would equal or fall below the dollar within six months. The last time this happened was between September and November 2022, when the rate was largely below the dollar.
Asked about the chances of the common currency reaching parity with the dollar in the next three months, a majority of almost 60%, 24 out of 42, said it was “low.”
“Over the next few months, the chances of parity are relatively low given how extreme the euro’s bearishness already is, especially in terms of relative rate cuts for the Fed versus the ECB,” said Erik Nelson, macro strategist at Wells Fargo (NYSE:).
“While there are many things, especially geopolitical, that could push the euro below parity next year, the positioning is already a bit extreme at the moment.”
The remaining 18 said the chances of equality at the end of February were ‘high’ or ‘very high’.
In a separate recent Reuters survey of economists covering eurozone and ECB policy, nearly 90% (34 out of 39) said newly-elected President Donald Trump’s proposed tariffs would significantly impact the eurozone economy in the coming years would influence.
“If Trump were to threaten to impose higher rates on the EU early next year, or if the ECB increased the pace of rate cuts – perhaps a larger cut of 50 basis points sometime in the next three months – the eurodollar would move towards and possibly below dragging parity,” said Lee Hardman, senior currency analyst at MUFG.
A majority of nearly 90%, 38 out of 43, responding to an additional question said it was more likely that the U.S. dollar would trade stronger than they forecast over the next three months than undermine those forecasts.
(Other stories from Reuters December currency poll)
