Is the euro set for dollar parity?

Descrier – by Benjamin Campbell

It’s difficult to fully digest the full financial impact of the Greek public’s decision to ignore its two long-standing major political players and opt instead for Alex Tsipras and his radical left wing Syriza party.

As with any political change, the true machinations of how this plays out on the markets can only really be known in hindsight. They key problem with Syriza – from an outsider’s point of view, at least – lies in the central disconnect between two of its defining policies. Mr. Tsipras and his party swept to power on a promise of ending austerity and renegotiating the terms of its bailout with the European Union. That, on the face of it, leads Greece out of the euro; but Mr. Tsipras has also promised that his country will remain in the single currency.  

Perhaps that disconnect is unsurprising, as Syriza itself is more of a coalition of left wing Greek political groups than a singular entity. Whatever the cause, the markets looked at Greece’s landmark election and failed to panic. The euro hit an 11-year low as the election reached its climax, but buying quickly set in and the euro was around 1.2% higher by the end of the day. Indices too remained calm, and for now it seems that euro traders are awaiting something more concrete to base trades off.

Back at the beginning of the year, getting through the Greek election unscathed looked like it might set the euro in good stead against the dollar for 2015. Thanks to ongoing strength in the USA, strong quantitative easing and some rash decision making from the Swiss National Bank, though, the picture is markedly different.

The US, it seems, is not going to slow in its recovery anytime soon. Mario Draghi’s much-anticipated QE program went beyond expectations in its scope and will arrive soon: but whether it is still too late remains unknown. In hindsight, the Swiss National Bank’s decision to remove its peg against the euro looks inevitable. In truth, very few predicted it: at least not those still invested in the euro.

As a result, the euro was down around 7% against the dollar on January 26. The next big question has loomed into view: will it go as far as parity with the dollar?

At the beginning of July last year, a single euro was worth $1.3691. By the end of the year, it had fallen to $1.2102. Towards the end of January, it had hit $1.128. Clearly, the drop against the dollar is accelerating (see below chart.

For the final major move, though, a serious blow to the euro’s value would have to materialise. US strength, QE and the Swiss Franc’s rise have all already come into play; what is left?

In the political side of things, the United Kingdom goes to the polls in May. Despite not being an active player in the euro, a major anti-European move could play out badly across the single currency. Many will be hoping that the threat of UKIP fades before the general election, but the Conservatives have promised a referendum if they gain a majority.

Ongoing oil issues may have a part to play, as well. The low oil price may be aiding much of the European economy, but it is also contributing to Europe’s weak inflation. Should quantitative easing not have a decisive effect against deflation, Mario Draghi may well be forced to act once more. What he could do is unclear, but more uncertainty about the global economy will not favour the euro.

Perhaps most likely to drive the euro down is a US rate rise. Another impressive non-farms figure, alongside a positive recalculation for the last months in 2014, means that it looks like the Federal Reserve will need just a few more factors to fall into place before considering a rate rise. If that happens within the next 11 months, forecasters may have to rewrite their predictions once more.

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