Euro could revisit parity with greenback

The Euro continues to come under pressure against the greenback as we enter the European trading session after bullish minutes delivered by the US Federal Reserve yesterday heightened expectations that further rate hikes from the US Central bank are on the way after keeping them on hold last month.

Fed board members agreed to hold interest rates steady at the June meeting as a way to buy time and assess whether further rate hikes would be needed, even as most indicated they would eventually need to tighten policy further, according to meeting minutes released on Wednesday.

While "some participants" wanted to move ahead with a rate hike in June because progress in cooling inflation had been slow, "almost all participants judged it appropriate or acceptable to maintain" the federal funds rate at the existing 5% to 5.25%, the minutes said.

With inflation in the US still hovering well above the Feds target rate and a continuing robust jobs day policy meeting on July 26 rose to 88.7%, according to CME Group's FedWatch Tool.

Apart from further rate hikes, the US dollar is likely to benefit from the current AI boom which is causing surging demand for the greenback and this trend is unlikely to end soon and could go on for several years.

This will reduce demand for currencies such as the Euro and may see the European currency visit levels since late last year and the possibility of once again hitting parity with the US dollar cant be ruled out.

"We expect the euro to depreciate markedly on the back of a further deterioration in economic activity," says Hubert de Barochez, Market Economist at Capital Economics.

A pessimistic outlook for major developed market economies" including the U.S. and the euro-zone, suggests to Capital Economics that the dollar will appreciate against most currencies, benefitting from risk-off sentiment.

"The upshot is that we forecast the euro to drop back to parity by the end of 2023, which would represent a fall of about 8% from its current level," says de Barochez.

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