The Eurozone’s single currency seems to be heading towards parity against the US dollar, starting the year above 1.20, now trading 1.0650.
In March 2014 EURUSD traded just shy of the 1.40 mark, the story is driven by the divergence in economic situations between the US and the European periphery. Following Draghi’s announcement of QE the sentiment towards the Eurozone has turned sour. Greece’s potential exit from the single currency has unnerved investors with the currency being traded as a proxy for the Eurozone’s stability.
Analysts have been citing EURUSD at parity, the dramatic decline in value of the Euro has picked up steam in recent trading sessions. If the move lower continues at this pace, parity could be reached as earlier as by the end of next week.
Deutsche Bank: #EURUSD will hit parity in 2015, 0.90 in 2016 and 0.85 in 2017— Abshire-Smith (@abshiresmith) March 11, 2015
Benefits of a weaker Euro
The weaker currency should be a positive for exporters, as the cost of finished goods will be lower for countries to import, pushing up demand. The softening of the Euro is coupled with a significant drop in energy prices, this is an ideal circumstance for the power house of Europe; Germany. Lower energy costs lead to lower production costs which should increase profit margins an increase in tax revenues for governments.
As traders have turned sour against the Euro, Sterling has strengthened against the single currency to the highest point in 7 years. EURGBP has traded down to 0.7053 (GBPEUR: 1.4178). The Eurozone is the main trading partner for the UK, the dramatic shift in the exchange rate is a benefit for importers, but could dampen exports. Throughout the economic crisis, the Bank of England has regularly attempted to verbally weaken the pound, however the latest move is a Euro led story.