Speculation is mounting among traders that the euro might decline to equal value with the US dollar, driven by persistent high inflation and solid economic performance in the US. These factors contribute to a belief that the Federal Reserve will delay interest rate cuts longer than the European Central Bank (ECB).
Market participants are actively purchasing options that would be profitable should the euro reach or drop below one dollar. According to Bank of America strategists, current option prices suggest that there’s now over a 10% likelihood of the euro hitting parity within the next six months—a sharp increase from nearly zero at the beginning of January.
Since January, the euro has weakened by 3.5% against the dollar. To reach parity, it would need to fall an additional 6.5%.
Francesco Pesole, a currency strategist at ING, noted a significant shift in market expectations. “There’s a growing consensus that substantial rate cuts by the Fed are off the table for now, while the ECB is anticipated to start reducing rates as early as June,” he explained. Furthermore, the cost of options betting against the euro has recently soared, highlighting increased market anticipation of the euro’s decline.
