Bank of America says the euro is still going to plunge to parity with the dollar

Bank of America Merrill Lynch’s latest forecast for the euro suggests it’s still going to get a lot weaker against the dollar, despite a recent uptick.

BAML’s researchers are saying the euro will reach parity (where one euro is equal to one dollar) by the end of the year. That’s despite the fact that the euro’s plunge has stalled, and even reversed a little.

Here’s their forecast in Green:

The euro slumped from nearly $US1.40 during the middle of last year to $US1.0484 on March 15. It’s since risen, and currently sits above $US1.08.

Here’s Bank of America’s justification for another big decline:

Beyond the short-term, we would expect divergence of monetary policies to continue weighing on the Euro. The ECB has announced optimistic macro projections, which we see as targets, justifying QE at least until September 2016, even if data improves further. Whether EUR/USD weakens well below current levels will depend to a large extent on whether the market starts expecting QE2 by the ECB next year. It is too early to make this call, but our economists believe that ECB QE 2 is more likely than not based on their inflation projections.

The basic thesis is that the Fed will be hiking US interest rates in the months and years ahead, which will drive demand for dollars, since investors will be able to make more on their dollar-denominated investments. The opposite is true for Europe, where the European Central Bank’s QE programme suggests it’s trying to keep interest rates as low as possible for at least 18 months.

The idea that the euro will drop considerably is contrary to HSBC’s view on the recent dollar rally — their researchers say this run of strength already outstripped the historically average average size of a dollar rally. That would suggest the US currency won’t get much stronger against the euro from here on out.

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