Morgan Stanley forecasts a 7% drop in euro as ECB accelerates rate cuts

American bank Morgan Stanley has predicted that the euro could fall to parity with the dollar within the coming months, as the European Central Bank intensifies its policy easing efforts to address a struggling European economy.

According to David Adams, head of Group-of-10 foreign-exchange strategy at Morgan Stanley, the euro is expected to depreciate to $1.02 by the end of the year, marking a 7% decline from its current value.

Adams explained that this forecast depends on the ECB cutting interest rates at its next three meetings, with the possibility of a substantial half-point rate cut.

“There is plenty of scope for the market to refocus on the fact that the ECB could be cutting deeper and faster than what is currently priced in,” Adams said in an interview reported by Bloomberg.

A more bearish projection for the euro

Morgan Stanley’s forecast is notably more bearish compared to the consensus among currency analysts surveyed by Bloomberg, who anticipate the euro will end the year at $1.11.

This divergence in views comes as the ECB prepares for a potential quarter-point rate cut at its meeting this Thursday, with the market closely monitoring the central bank’s future actions.

Currently, money markets expect approximately 60 basis points of easing in Europe for 2024, compared to a steeper 110 basis points in the US.

The primary drivers behind this expected decision are weakening inflationary pressures and sluggish economic growth across the eurozone.

Source: Bloomberg

Adams commented,

There is plenty of scope for the market to refocus on the fact that the ECB could be cutting deeper and faster than what is currently priced.

“This week’s meeting could prove to be an important catalyst for the market to start considering that,” he added.

Options traders are growing increasingly cautious about the euro’s outlook ahead of the ECB meeting, as the cost of securing bullish positions for the upcoming week declined on Monday.

Political uncertainty adds to euro’s challenges

Beyond monetary policy, rising political uncertainties in Europe are exacerbating the downward pressure on the euro.

While French politics have dominated headlines recently, Adams noted that political developments in Germany could also threaten the region’s stability.

“Political risk premiums and uncertainty are rising at a time when economic growth is slowing,” he observed, adding that these factors may deter investors from deploying capital in the eurozone.

In line with his bearish outlook, Adams has been recommending a short euro-dollar position since February, further influenced by the potential impact of the upcoming US election on the dollar.

Additionally, Mario Draghi, former ECB president and ex-Italian prime minister, on Monday urged the EU to increase annual investments by €800 billion to keep pace with global economic leaders like the US and China.

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