The euro is trading at its weakest in months, and a parity test with the dollar may not be out of the question

By Barbara Kollmeyer

Americans headed to Paris and other European spots with fists full of dollars this summer might be in luck, as strategists see little to stop the euro careening lower in months to come.

The euro was hovering at its weakest in months on Friday, amid growing bets the European Central Bank will beat the Federal Reserve to the punch with the first rate cut, if not cuts, this year.

The currency (EURUSD) fell 0.7% against the dollar to $1.0655, the lowest since around November. The ICE Dollar Index DXY, which gauges the greenback against a basket of major currencies, has gained 1.5% this week, while the euro has lost 1.7% against the buck.

Data released Friday showed German consumer prices confirmed an annual 2.2% rise in March, the lowest since May 2021, while French data backed up previously reported numbers showing a CPI slowing to 2.3% from 2.6% in February. That's as U.S. CPI roiled investors this week with hotter-than-forecast numbers that further pushed back on rate-cut expectations.

From a year that started with some on Wall Street expecting six U.S. rate cuts this year, Deutsche Bank strategists said Thursday that investors will get one, and not until December. ECB President Christine Lagarde, meanwhile, offered as-expected hints on Thursday that the central bank could lower rates by summer.

The U.S. CPI surprise "caps the upside and allows for potential downside in the coming days," of the euro that could drop to $1.05, Kit Juckes, chief foreign exchange strategist at Societe Generale, told clients in a note Friday.

The euro has not set foot in parity territory with the dollar since July 2022, months after Russia's invasion of Ukraine, which drove fears of a slowdown on the continent driven by reliance on Russian energy. Investors also believed that the Fed was fighting inflation harder than the ECB at the time.

Juckes backed up his view with the below chart of the differential between 2-year German government bond BX:TMBMKDE-02Y and Treasury yields BX:TMUBMUSD02Y, which has been closely tracked by the euro-dollar pair historically. "Simply eyeballing the chart suggests $1.05 is in danger," he said.

He said the market expects the Fed will ease by less than the ECB in the months ahead, so a June ECB cut, not a Fed one, said the strategist.

"If it looks likely that the ECB will cut in June and July, while the Fed does nothing in either meeting, EUR/USD will remain under downward pressure and if we get to the U.S. election with 3 ECB cuts in the bag, and none from the Fed, another test of parity is a real danger," said Juckes.

He added that with just one month of U.S. CPI data ahead of the June meeting, and three months worth before the July meeting, much information is still to be processed before Fed Chairman Jerome Powell and his team can make any decisions.

Other analysts agreed that there was little holding up the euro right now.

"The diverging rates scenario leaves the euro susceptible to additional weakness against the dollar, now that this year's earlier low near the $1.07 handle has been taken out. The next downside target could be $1.06 before we potentially see a descent toward $1.05," said Fawad Razaqzada, market analyst at City Index and Forex.com, in a note.

He added that after $1.05, a test of the October low of $1.0448 is possible. "The EUR/USD had been stuck in a very tight range in recent months and never looked like it was about to take off soon anyway, all thanks to consistent weakness in eurozone data," said Razaqzada.

-Barbara Kollmeyer

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04-12-24 0838ET

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