Here’s Why EUR to USD Exchange Rate Could Drop Below Parity
The EUR to USD exchange rate could break well below parity. All the stars are lining up perfectly for a massive decline in the euro and upside in the U.S. dollar.
Before going into any details, let’s go to the basics; when it comes to currency markets, factors such as interest rates and economic growth really matter. If a country has solid economic growth and higher interest rates, chances are its currency will see upside.
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So, when looking at the EUR to USD exchange rate, it’s important to pay attention to these factors.
When you do just that, clearly the U.S. looks to be the stronger of the two.
The U.S. economy may not be performing on par with its historical average, but it’s moving at a decent pace for now. Unemployment in the country is low, and other economic data suggests there’s stability.
At the same time, the Federal Reserve is planning to raise interest rates. Currently, the interest rate set by the Fed stands at 0.75%. By 2019, it’s expected to be over two percent.
This, at the very core, is great for the U.S. dollar.
Looking at the eurozone; the outlook is dire.
For instance, not too long ago, the International Monetary Fund (IMF) released its projections for the global economy. For the euro area, the IMF expects growth of 1.6% in 2017 and 1.6% in 2018. This is lower than what it estimates for 2016—around 1.7%. (Source: “World Economic Outlook Update January 2017,” International Monetary Fund, last accessed January 24, 2017.)
Unemployment in the common currency region is still a major concern and the biggest economic hubs in the region continue to struggle.
If you pay attention to the interest rates, the European Central Bank (ECB) is implementing a negative interest rate policy (NIRP), and printing money. In other words, interest rates are expected to remain low for a long time.
It can’t be stressed enough; this is not good for the EUR to USD exchange rate.
There’s one thing that must be understood as well; there are a lot of moving parts in Europe.
For instance, Britain is in the process of leaving the eurozone. This is going to have consequences across the eurozone as well. Remember; England is/was an integral part of the European financial system and it traded with nations across Europe.
With this, it wouldn’t be shocking if European investors find refuge in other currencies, such as the U.S. dollar. If this is the case, it could bring down the EUR to USD exchange rate much lower.
EUR to USD Outlook for 2017: The Worst Is Yet to Come
Dear reader, keeping all this in mind, it wouldn’t be shocking if the EUR to USD exchange rate drops below parity in 2017. It may sound bold, but it also wouldn’t be surprising if the survival of the euro gets questioned as well in 2017.
What would change this dire outlook on the EUR to USD exchange rate? Parity on the euro against the U.S. dollar could be avoided if the U.S. falls in an outright recession, the eurozone makes a miraculous recovery, the ECB changes its monetary policy, and the Federal Reserve starts lowering rates.
