The calls for euro-dollar parity in 2017 are getting fainter.
Barclays analysts said in a report on Thursday that they see the euro reaching a turning point “amid accelerating inflation and stronger economic data”, and as the currency rebounds from the excessive pricing of political risk for the slate of elections set to take place across the eurozone this year.
The move comes after European political watchers breathed a small sigh of relief following the first of those elections, in the Netherlands, which saw Dutch voters buck the rising populist trend and reject a challenge from far-right challenger Geert Wilders.
Also likely to affect the single currency, Barclays said, was the fact that tightening by the European Central Bank in 2018 had already been priced in by investors.
The bank said it is forecasting the common currency to reach $1.09 in the second quarter of 2017, before falling as low as $1.03 in the fourth quarter before rebounding to $1.05 at the start of 2018. Barclays had previously forecast the euro potentially dipping a penny below the $1 line in the fourth quarter of 2017 to 99 cents. It traded at $1.08 on Friday.
But don’t rule out the unpredictable just yet, especially on the political front, Barclays said:
Political risks are likely to weigh on the euro again in 2018, with many events potentially threatening its very existence amid a ‘Balkanized’ European Council, such as Italian election and banks, Greek and Portuguese debt.
Meanwhile, the bank sees “only modest US appreciation” likely to peak in the fourth quarter.
The cyclical advantage of the dollar might erode as more robust global growth and inflation materialize, while sideways moves appear more likely without a significant policy boost that shocks rates and equity risk premia higher. The path for the dollar is subject to uncertainty in fiscal and trade policies, which could lead to vastly different outcomes.
The forecast makes Barclays the latest bank to back away from the euro-dollar parity prediction that economists surveyed by the Financial Times were making at the end of last year, with the dollar index — which measures the greenback against a basket of its peers — hitting a 14-year high in the wake of Donald Trump’s election.
Earlier this week, Citi dimmed its expectations for a rally in the US dollar, saying that it no longer expects it to reach parity with the euro over the next year.
Oxford Economics also wrote:
An overload of expectations and rich valuations amid global reflation mean the dollar won’t benefit much from positive US surprises. Steady growth in other blocs is beginning to challenge the US-centric view of global reflation. Cheap European currencies, especially the euro, will be key beneficiaries of a market reassessment of relative policy outlooks. Oversold currencies such as sterling will take a breather from heightened perceptions of idiosyncratic risk. Finally, much of EM FX looks like it’s in a good place against the greenback.
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