Citi and JPMorgan predict the euro will fall to parity

It is anticipated by Wall Street banks that the euro will reach an equal value to the dollar by the end of the year.

The single currency is being weakened by increasing energy costs and slow expansion in the eurozone.

Financial issues in Italy are causing a rise in negative sentiment.

The dollar is joining the group of "commodity currencies" instead of being an exception.

The dollar has seen a 6% increase since July due to strong economic data in the US, while the eurozone is facing a recession. Worries are increasing about a potential recession in Germany, which has historically been the main driver of growth in the eurozone.

Last week, the German government issued a warning that the German economy would shrink by 0.4% this year, with the IMF predicting it to be the worst performing economy among major countries. The forecast was revised downwards from the previous economic growth outlook.

By the end of 2023, JPMorgan anticipates that the euro will drop to an equal value with the US dollar due to increasing energy costs and a decrease in economic growth.

A potential consequence of the conflict in the Middle East could be an increase in energy prices imported into Europe, which in turn could lead to higher lending rates and a decrease in GDP growth in the eurozone.

Investor worries about Italy's financial issues have caused a rise in negative sentiment towards the euro. On Monday, the difference between the yields of Italian and German benchmark bonds reached 2.01%, surpassing the critical level of 2%.

The ECB could be put under pressure by the tight bond market, leading to a halt in the raising of interest rates or even a decrease.

It is anticipated by Citibank that the euro will reach parity within a period of six months.

In recent weeks, Rabobank, Nomura, and RBC Capital Markets have all lowered their forecasts, predicting that the euro will drop to $1.02 by the end of the year or early 2024. Nomura believes that if oil prices rise above $110 per barrel, it will be difficult for the euro to avoid reaching parity.

According to the Financial Times, the dollar has become a part of the group of currencies known as "commodity currencies," as the U.S. is a net exporter of key commodities.

The US currency has been bolstered by the recent rise in oil prices, similar to the dynamics seen with the Canadian dollar or the Norwegian krone. This has improved the country's terms of trade.