Euro on the Brink of Breaking Last Support Levels Before Parity

(Bloomberg) — The euro is now on the cusp of breaking one of the last major support levels before it tumbles toward parity with the dollar.

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The shared currency slipped to a fresh five-year low of $1.0350 on Friday, just above the January 2017 trough of $1.0341. A breach of that level would put the euro at the weakest since it was last on even footing with the greenback almost two decades ago.

Strategists at HSBC Holdings Plc, RBC Capital Markets and JPMorgan Chase & Co. are among those who believe the euro-dollar pair will at least test parity, weighed down by worsening growth prospects for the continent as a result of Russia’s invasion of Ukraine. In contrast, the dollar has been supercharged by a hawkish Federal Reserve and haven flows as markets mull global recession risks.

“The trade-off between growth and inflation has become much more challenging around the world, but the Eurozone faces the most acute pressures,” HSBC strategists including Paul Mackel wrote in a note to clients. They see the euro falling to parity with the dollar by the end of the year, before continuing a “modest decline” during the first half of 2023.

Euro Slide to Parity With Dollar Is Top Options Trade for Funds

The slide in the common currency comes despite the fact that some European Central Bank officials including President Christine Lagarde are signaling they’re ready to enact the first rate increase since 2011 at the July meeting. Markets are wagering on three 25-basis-point hikes from the central bank this year.

“The euro has blatantly struggled to draw any tangible benefits from the increasingly hawkish tone among ECB policy makers,” ING Bank NV strategists including Francesco Pesole wrote in a note to clients Friday, adding that there’s “lingering uncertainty” about whether the ECB would be able to deliver many more hikes given the deteriorating economic outlook.

The euro retraced some of its earlier declines, trading 0.3% stronger against the dollar to recover above $1.04 as of 11:20 a.m. in New York.

The odds of the currency hitting parity in the next 12 months have risen to about 60%, according to options prices compiled by Bloomberg. More than $7 billion in notional value has been staked on that outcome since the ECB’s last meeting on April 14, according to data from the Depository Trust & Clearing Corp.

(Updates throughout.)