EUR/USD Heading Towards Parity?

• An Overview of the European and U.S. Economies
• What Factors Sustain the Negative Outlook for the EUR/USD Pair?

The golden question of late: "Will the euro drop to parity against the dollar?" While it's a plausible scenario, numerous factors could drive the euro lower, just as others might pave the way for a rebound against the U.S. dollar.

Overview of the European Economy

The European economy hasn't been at its best recently, grappling with economic challenges and geopolitical tensions that undermine overall stability in the region and the euro's performance against the dollar.

Annual inflation in the eurozone rose to 2.3% in its latest reading, marking the highest rate since August. Moreover, economic growth in the euro area has slowed significantly, registering a 0.9% year-on-year rate for Q3 2024.

Additionally, major European economies are experiencing elevated inflation rates. In Germany, annual inflation rose to 2.2%, its highest since August, while in France, it climbed to 1.3%, its highest since September. These figures suggest the potential for renewed inflationary pressures, leaving the European Central Bank (ECB) in a difficult position: either lowering interest rates to support economic growth or altering its accommodative policy to curb inflation.

Expectations point to a 25 basis point rate cut in the eurozone during the upcoming ECB meeting, down from earlier forecasts of a 50 basis point reduction. Investors and traders should monitor ECB President Christine Lagarde's statements about the next steps, as they could significantly impact the markets, according to analysts.

Overview of the U.S. Economy

The U.S. economy has outperformed its European counterpart recently, particularly following Trump's election victory. Markets have seen significant gains across major U.S. indices and the dollar.

One key factor supporting the dollar's strength is the anticipated shift in the Federal Reserve's monetary policy away from accommodation, starting in 2025. This move is intended to prevent the return of inflationary pressures under Trump's administration, further bolstering the dollar's strength against the euro in the short to medium term.

The primary drivers of the euro's potential drop to EUR/USD parity or continued decline are the sustained strength of the dollar. While the euro's weakness appears largely priced in by markets, the dollar is expected to dominate in the coming period. Of course, this outlook could change if surprises arise from central bank meetings in Europe or the U.S.

Technically, what Conditions Maintain the Negative Outlook for EUR/USD Parity?

As shown in the chart below, the EUR/USD pair has been trading in a general downtrend on the daily timeframe since November, forming lower lows and lower highs.

The sole condition for reversing this bearish trend towards into a bullish one EUR USD parity is a price rise above the 1.06099 level, followed by a daily close above it. On the other hand, a break below the 1.03331 level indicates continued bearish momentum for the pair, according to the analyst's insights.

Figure 1: EURUSD Daily Chart, Trading View