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EURUSD: Parity Risks Loom Large in '25

EURUSD
USGlobalCEEMEABulletMarketsForeign Exchange BulletsRegionNorth America
  • EUR/USD's fresh pullback low at 1.0611 today equates to a near 3% sell-off since the election results last week and a >5% downleg off the YTD high at 1.1214. This keeps alive the speculation that EUR/USD could hit parity under an adverse trade war scenario or a particularly hawkish turn from the Fed.
  • While markets see little likelihood of EUR/USD testing that mark in the near-term, but the risk picks up materially thereafter.
  • Just $650mln notional has traded in EUR/USD vanilla put options with a strike at 1.00 or below since November 1st on the DTCC - a relatively meagre % of the $300bln market this month. This providies little concrete evidence of the market's focus on parity just yet - reflected in premiums pricing just a 2.3% chance of payoff for a EUR/USD 1.00 one-touch option expiring on Dec31 this year.
  • We wrote last week that speculation of parity is building, however. The risk becomes much more apparent further down the curve and into the Trump admin's first few months. Compounding this effect, the implied Fed-ECB rate differential has grown considerably for Jun'25, from ~40bps to ~130bps in six weeks.
  • As a result, markets now price a 24% chance of touching parity by end-Jun'25, up from 9.6% ahead of the election/German government breakdown.
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  • EUR/USD's fresh pullback low at 1.0611 today equates to a near 3% sell-off since the election results last week and a >5% downleg off the YTD high at 1.1214. This keeps alive the speculation that EUR/USD could hit parity under an adverse trade war scenario or a particularly hawkish turn from the Fed.
  • While markets see little likelihood of EUR/USD testing that mark in the near-term, but the risk picks up materially thereafter.
  • Just $650mln notional has traded in EUR/USD vanilla put options with a strike at 1.00 or below since November 1st on the DTCC - a relatively meagre % of the $300bln market this month. This providies little concrete evidence of the market's focus on parity just yet - reflected in premiums pricing just a 2.3% chance of payoff for a EUR/USD 1.00 one-touch option expiring on Dec31 this year.
  • We wrote last week that speculation of parity is building, however. The risk becomes much more apparent further down the curve and into the Trump admin's first few months. Compounding this effect, the implied Fed-ECB rate differential has grown considerably for Jun'25, from ~40bps to ~130bps in six weeks.
  • As a result, markets now price a 24% chance of touching parity by end-Jun'25, up from 9.6% ahead of the election/German government breakdown.