On the day of Trump's inauguration, will the euro reach parity with the US dollar?

As the United States prepares for the return of a former president, the foreign exchange market is gearing up for a rare event: the euro reaching parity with the dollar. According to strategists at banks such as BNY Mellon and Mizuho Bank, this could happen later this month after Trump's inauguration. Since late September last year, the euro has fallen by more than 7% against the dollar, reaching a low of 1.0226 last week, the lowest level in over two years. Options markets suggest a 40% likelihood of the currency pair reaching parity this quarter, with trading volume surging last week for contracts targeting this level. The market is watching for the consequences of Trump's inauguration on January 20, looking for potential catalysts. BNY Mellon and Mizuho Bank anticipate that Europe could be a sacrificial pawn in a potential trade war, and differing growth expectations between Europe and the US could lead to a rare period of dollar strength not seen in 20 years. Both banks believe that the euro will reach parity with the dollar sometime this month. BNY Mellon's senior strategist Geoffrey Yu said, "We are not far from this target, so it could happen soon." He expects bearish sentiment towards the euro to peak around the end of January with the meetings of the Fed and the ECB. "Parity is inevitable." Since the birth of the euro in 1999, instances of the euro reaching parity with the dollar have been rare and usually indicate that the economic environment in Europe is relatively worse than in the US. The last time this happened was in 2022 during the Russia-Ukraine conflict which caused an energy crisis in Europe and concerns of economic recession. Currently, concerns over energy supply and security persist, with last week's gas interruption from Russia to Europe via Ukraine serving as a reminder. Europe's export-oriented economy is scrambling to address the threat of US trade tariffs, reflected in expectations that the ECB will have to significantly cut interest rates, contrasting sharply with the Fed's gradual approach. Political instability in the eurozone's largest economy adds to the pressure. Antony Foster, G-10 FX spot trading manager at Nomura Securities, said, "Market sentiment couldn't be worse." He believes that January 20 could serve as a potential catalyst for further weakening of the euro if Trump launches tariff policies shortly after his inauguration. Although the euro rebounded this week against other currencies, and reports suggest options traders are abandoning bets on parity, other major banks such as JPMorgan Chase believe that reaching that level is still possible this quarter. UBS believes it is more likely to happen in the second quarter. Jane Foley, head of FX strategy at Rabobank, stated that this largely depends on the market further confirming benign inflation trends to support the ECB's more aggressive rate cuts. The latest inflation data showed that in December, the eurozone's harmonized CPI rose from 2.2% in November to 2.4%, while the core harmonized CPI exceeded expectations at 2.8%. Overall, the market expects the ECB to cut the deposit rate to 2.75% at the next meeting, while the Fed is expected to maintain rates between 4.25% and 4.5%, highlighting the widening divergence in their monetary policies. BNY Mellon's asset management of over $50 trillion shows that investor holdings in the euro are at their lowest level in 20 years. Foster from Nomura Securities asked, "How could anyone be bullish on the euro?"