Nomura expects euro to fall back to parity

When one central bank goes in one direction and another goes the opposite way, the exchange rate between their two currencies is likely to give.

That is what analysts at Nomura expect euro/dollar to do as the US Federal Reserve is likely to hike rates in December – for the first time since 2006 – while the European Central Bank is still hell-bent on easing.

The divergence between each central bank's monetary policy will drive the single currency towards parity versus the Greenback over the coming six to nine months, Nomura’s head of FX Strategy, Jens Nordvig, said in a research note dated 18 November.

“In particular, if the ECB is willing to lower its deposit rate continuously during 2016 (perhaps towards -50bp), we think there is finally a high probability that parity (1.00) will be tested. The most likely timing is mid-2016, as it may take that long for the Fed to deliver its ‘second hike’ and given that market psychology on euro trading has become more cautious than in 2014 and early 2015,” Nordvig said.

Previously, the analyst had expected euro/dollar to trade at 1.06 in the third quarter of 2016.

He also lowered his forecast for sterling, anticipating that it will rise to 1.57 in the first three months of 2016 (down from a previous forecast of 1.60) and then fall back down to 1.53 at the end of the third quarter (down from a previous forecast of 1.61).