EUR/USD on course for 20 year lowsAs conditions remain ripe for USD appreciationECB rate hikes to offer scant support for EUR

Above: The Chase Tower, New York © Kristen Cavanaugh, Flickr, reproduced under CC licensing.

The Euro is now forecast to fall to $1.00 by analysts at JP Morgan who expect an extension of the broader USD rally while warning the Ukraine war's stagflationary effects on the Eurozone will blunt any potential strength arising from European Central Bank rate hikes.

"EUR/USD is now expected to test parity for the first time in 20 years," says Meera Chandan, FX Strategist at JP Morgan in London.

The Wall Street bank's updated views on the Euro to Dollar exchange rate (EUR/USD) largely relies on the belief the U.S. Dollar is not done appreciating.

Specifically JP Morgan argues macro economic conditions in the past month have become even more conducive to their bullish USD view.

"The growth slowdown has broadened with even the US not immune and China spillovers to the rest of the world are a risk, with the Eurozone more vulnerable," says Chandan.

Last week saw the Dollar index - a measure of broad USD performance - reach its highest level in 20 years at 105.00, with corresponding multi-year lows of 1.0348 in EUR/USD and 1.2155 in GBP/USD being printed. (Set your FX rate alert here).

The deterioration in the global macroeconomic landscape comes alongside substantially shallower liquidity in the market and increasing USD scarcity, courtesy of the U.S. Federal Reserve's ongoing efforts to shrink its balance sheet.

Chandan says this warrants increasingly defensive exposure and a need to mark down key currency forecasts as a result.

Above: USD TWI (3m %change) modelled vs. US – global growth forecast revision and global growth downgrades; %. "USD isn’t overshooting—the strength is fully explained by growth downgrades in hand; there is no excess premium for tail risks" - JP Morgan.

Turning to the Euro, Paul Meggyesi, Head of Global FX Strategy at JP Morgan says the market is finally accepting that the Ukrainian war is a disproportionate shock to the Eurozone economy and a threat to the currency, something he has argued since the onset of the war.

The European Central Bank (ECB) has meanwhile become increasingly vocal about the need to raise rates, with the market now firmly fixed on a July rate hike.

A typical market response would be to buy the Euro as a result, yet the EUR/USD has not responded in an enduringly positive manner.

Meggyesi says this is because the Eurozone economy is facing stagflationary risks, where inflation surges but growth remains muted.

Above: EUR/USD = 1.31 + 0.127 (EUR-USD 2Yx3M OIS). R2 = 78%, SE = 0.021. "Stagflation leads to ‘bad news’ rate hikes from an FX perspective, hence EUR/USD is decoupling from nominal rates" - JP Morgan.

"Stagflation is a toxic scenario for a currency whatever the reaction of the central bank," he says. "Ultimately there is little the ECB can do to counteract the pernicious effects of a stagflationary shock on EUR."

Jason Hunter, technical analyst at JP Morgan, says the ongoing EUR/USD decline recently extended to test the 1.0341 Jan 2017 range low and although the pair is subject to "deep oversold conditions" there is little evidence of an imminent trend reversal.

JP Morgan's house forecast now sees the Euro to fall to 1.0 against the Dollar during the third quarter of 2022.

Fellow Wall Street bank Morgan Stanley has meanwhile updated its forecasts for the Euro-Dollar exchange rate and see a low point of 1.03 being attained by the third quarter of 2022, but warns a test of parity is not an unreasonable proposition.

In a mid-year research update Morgan Stanley says the Dollar should reach its peak by around the third quarter of 2022 before starting to trend lower.

Importantly they don't see the Dollar index breaking above its recent highs suggesting lows in EUR/USD, GBP/USD and other USD pairs will be defended and dips below here will ultimately prove shallow.