EUR/USD: A breach of parity this quarter is now a very plausible risk – MUFG

During June the euro weakened versus the US dollar moving from 1.0723 to 1.0463. In the view of economists at MUFG Bank, we could see a period of EUR/USD trading below the key psychological level of 1.00.

EUR/USD still set to rebound in Q4 

“We suspect the risk for US and global equities remains to the downside in Q3 as inflation remains elevated; growth slows; and the Fed and other central banks continue to tighten. That suggests further downside risks to EUR/USD over the short-term as financial conditions tighten further.”

“Our near-term view for EUR to drift lower is also based on the primary risk for near-term growth in the eurozone – a further spike higher in natural gas prices. As natural gas prices rise, recession risks will increase putting downward pressure on the euro.”

“We have lowered our Q3 EUR/USD forecast notably (from 1.0600) and consider a breach of parity this quarter as now a very plausible risk.”

“Assuming risk conditions slowly turn more favourable and inflation risks recede, EUR/USD has greater scope to move higher beyond Q3/Q4.”