The euro area grew just 0.2% in the first quarter, as Italy contracted, France flat-lined and expansion in Spain slowed. Factory output and new orders have slumped and business confidence is evaporating. With the common-currency bloc’s proximity to the Russia-Ukraine conflict and dependence on cross-border trade, Europe is at the epicenter of global concern over rising prices and slowing economic growth.
Foreign-exchange traders are set to pummel the euro anew as the war in Ukraine and the supply-chain crisis ramp up stagflation risks — driving the single currency to parity versus the dollar for the first time in nearly two decades.
For 60% of respondents to the latest MLIV Pulse survey, the euro will eventually end up level with the greenback, with a small majority of more than 400 participants betting it will then recover to $1.15. It traded at about $1.05 on Friday, near its weakest since early 2017.
Some 48% of those polled, who include economists and portfolio managers, project fresh losses to $0.95 — a notably more bearish outlook than Wall Street investment banks.
40% of respondents fearing a recession in the region more than inflation and the same proportion fretting over stagflation. MLIV readers’ concerns underscore the European Central Bank’s policy headache as it seeks to cool rampant price pressures without killing off the business cycle.
Economists have cut their 2022 eurozone growth forecast to 2.8% from 4.2% at the start of the year. Yet the risk of a recession is rising after Russia halted the flow of gas to Poland and Bulgaria. Businesses and consumers in Europe are facing a squeeze as prices rise, while China extending lockdowns blights the global growth outlook.
The median currency prediction of professional forecasters is for the euro to rally to $1.12 by year-end, with no bank surveyed currently predicting parity. ABN Amro Bank NV did briefly make the case in March, though revised its call higher a few weeks later. Nomura Holdings Inc. previously warned a win for far-right candidate Marine Le Pen in France’s election could drive the currency to parity.
The euro’s weakness has been partly predicated on dollar strength, but now that Federal Reserve Chair Jerome Powell has downplayed the prospect of a 75-basis-point hike, the U.S. currency may start to look overbought. Meanwhile, moves in currency-hedging costs may soon make it more appealing for Japanese investors to own bunds over Treasuries, supporting the single currency.
U.S. monetary-policy tightening will eventually prove insufficient to boost the dollar further — just as the ECB potentially begins to hike rates as soon as July.
If this bullish road map comes to pass, it would vindicate the 20% of respondents who see the euro reaching parity first rather than the $1.10 level and then rebounding to $1.15 instead of falling further.
