The euro may have avoided parity with the dollar so far, but strategists think it's an inevitable waypoint in a slide that could leave the common currency trading well below that milestone.
The euro bounced back from a low of $1.00003 on Tuesday and is holding at about $1.003. It could come under fresh pressure as soon as today, especially if the latest US inflation data fuels expectations of a more hawkish Federal Reserve.
The greenback's bid is unlikely to abate despite a darkening global growth outlook. The picture in Europe is particularly grim due to fears that a halt to gas flows from Russia could cause an economic crisis in the region and curtail the European Central Bank's ability to raise rates, a major problem for the currency.
David Page, head of macro research at AXA Investment Managers, said it wouldn't take much to tip the euro below that parity number. It is more than just an interest-rate story, it is more fundamental. He said that the adverse risks in the global economy are joining up to support the dollar at the moment.
Economists predict that the US inflation will likely hit a Pandemic peak in June, which could cement a second consecutive 75 basis-point hike from the Fed. The consumer-price index was probably up 8.8% from a year earlier, the largest jump since 1981, according to a Bloomberg survey ahead of Wednesday s release.
UBS Group AG and BCA Research Inc. believe that the euro will plunge as low as $0.90 by the winter in a worst-case scenario. It has fallen almost 12% against the dollar this year.
Bearish signals indicate that a move below parity remains the base case. Since February, parity has been supported by a trend channel.
Stephen Innes, managing partner at SPI Asset Management said that the magnetic attraction of EURUSD sub parity may be irresistible for macro investors because none of the positive euro factors seem close to materializing.
The single currency is struggling to catch a break against the pound. That sparked a crisis in the UK as the UK grapples with political uncertainty, the aftermath of Brexit and the searing inflation, an outlook so dire that it has prompted Bank of America strategists to warn of an existential crisis for sterling.
The euro posted its worst weekly performance against the pound since March last week, and has since dropped to around 84.20 pence. It got a boost Wednesday after comments from Bank of England Governor Andrew Bailey hinted at larger rate hikes, climbing as much as 0.4% to $1.1936.
Dominic Bunning, a foreign exchange strategist at HSBC Holdings Plc, sees the pair trading back to 84 83 pence, with much of the negative news now priced into the pound. He said he was not recommending an outright buy for sterling, especially against the dollar, because it may start to make headway against the euro.
Not everyone agrees. Mathieu Savary, chief strategist at BCA Research Inc., sees the single currency climbing back to 90 pence given the potent headwinds confronting the pound. He urged caution over trying to call the euro's bottom against the dollar, especially as it drops below $1.
He said automatic selling would result in a cascading decline for a territory that has not been chartered for the past 20 years, and that automatic selling will be triggered by the euro tests parity. The US has plenty of Natural Gas, and none of it is Gaining Ground.