EUR/USD: Break below parity is likely, could trigger a plunge to 0.95 on a 1 to 3M view – Rabobank

The decline in EUR/USD during the current week has been a function of broad-based dollar strength, point out analysts at Rabobank. They see the euro vulnerable to increased concerns over energy supplies. 

Key Quotes: 

“We continue to see downside potential in EUR/USD as linked to distinct bullish USD and bearish EUR factors. The outlook for the Eurozone economy over the winter is undeniably linked to energy supply. It has been our central view for some months that the Eurozone economy will suffer a mild recession over the coming winter. This assumes some continuation of gas supply to end-users in the region. An outright energy shortage would clearly make the situation worse and at the same time could enhance the inflationary risks for the ECB. This is no longer a far-fetched prospect and is a scenario which would likely enhance downside pressure on EUR/USD.”

“More headwinds for this sector would clearly further worsen the outlook for growth. At the same time higher input prices could underpin inflationary pressures in the region. While this could result in a more hawkish-for-longer ECB, we would not expect this to be a supportive environment for the EUR.”

“Both Daly and the minutes of the Fed’s latest policy minutes have suggested that the Fed could favour a ‘raise and hold’ strategy, suggesting that rates could be higher for
longer through next year and beyond relative to the levels the market has been expecting. This is not good news for equity bulls; however, it is supportive for the medium-term outlook for the USD. We retain of the view that the USD will remain well supported against a broad base of currencies on a 6 month view. We see risk that a move below EUR/USD near-term could spark a plunge to 0.95.”