November 13, 2015    3 minute read

EUR/USD Parity

   November 13, 2015    3 minute read

EUR/USD Parity

The EUR/USD parity is not a utopia. The topic was discussed last March when EUR/USD plunged below the key level of 1.05 and recently analysts brought it out again. EUR/USD is currently traded at 1.07 and few weeks ago BoAML revised its end-2015 projection to 1.05.

Traders forecast the parity should be reached next year, but only under some crucial assumptions. The first is the US interest rates hike and the second is ECB deposit rate cut. Some individuals support the theory and some other to stand up against it, but the truth is that it is probably too early to reach a conclusion. Nevertheless, lots of information are available and some key features could be analysed.

The Fed is expected to hike interest rates at its December 16 meeting. Last July Janet Yellen was already considering to “take the first step to raise federal funds rate and thus begin normalising the monetary policy” before the end of 2015. Afterwards, during the Fed meeting of September, the Committee decided to leave rates unchanged due to a not-so-strong US economy and, especially, to the “notable volatility” experienced by emerging markets economies after the plunge of the Shanghai Composite Index. Today things are doubtlessly changed. The Chinese economy is stabilising and in the US the labour market is getting stronger. The 6th of November the Nonfarm Payroll was 271k while the expectation was just 180k. In addition, also the actual Unemployment Rate (5.0%) was better than the forecast (5.1%). After the data came out, Janet Yellen stated raising rates in December “would be a live possibility” and in the same time the odds of the hike priced in the interest rates futures jumped to 66%.

In Europe the situation is completely different. The European economy is characterised by the Quantitative Easing program and all time low interest rates. The ECB aims to boost the economy in order to reach the inflation target just below 2.0%. Unfortunately, the goal is still far away and Mario Draghi, ECB President, last month hinted that a cut in the deposit rate (already negative) was being considered.

 

EurUsd

Source: FXCM

As the graph shows, the EUR/USD has broken the trend channel (grey lines) in which it was bound and now it is clearly in a downward trend. The chart displays the EUR/USD from the beginning of 2015 to the 11th of November. The EUR/USD was traded at 1.23 in January, while current exchange rate is 1.07. In a nutshell, the Euro experienced a depreciation of 13% against the Dollar, partially caused by the 60 billion of Euro per month that the ECB is pumping in the market. The price has recently fallen below both the EMA 20 and the EMA 50, and, even more important, the EMA 20 crossed downward the EMA 50. The last time these two events happened together was at the beginning of August, before the China news came out. The market is showing strong signals and traders are impatiently waiting the Fed meeting to get the first significant confirmation.

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