FX Market Update: EUR/USD Heads to Parity

The main theme in the financial market was the continued strength of the US dollar, which has soared to the highest point in years. This theme may continue this week as the US releases strong inflation numbers and bond yields soar.

US dollar index rally continues

The greenback continued its strong rally against developed and developing country currencies after the US published strong jobs numbers. According to the Bureau of Labor Statistics, the economy continued its strong performance, adding 256k jobs in December and the unemployment rate falling to 4.1%.

These numbers mean that the economy is still experiencing full employment, which happens when the jobless rate falls below 5%. The concern, however, is that inflation has remained stubbornly high, a trend that may continue this year.

The US will publish the December inflation data on Wednesday. Economists expect these numbers to show that inflation continued rising in December, with the headline CPI expected to come in at 2.9%, up from 2.7% in November.

Analysts now expect the US dollar strength to continue as the Federal Reserve delays its interest rate hikes. That explains why the US bond yields have continued rising this year, with the 30-year crossing the 5% mark for the first time in years. In a note, analysts at ING said:

We will get confirmation next month with revisions to subsequent data too. That could yet change the story, but for now we have to admit that our forecast of three rate cuts in 2025 may be too aggressive.

ING Analysts

GBP/USD crashes ahead of inflation data

The GBP/USD exchange rate has continued its strong downtrend this year, retesting the crucial support level at 1.2200, its lowest level since November 2023. It has crashed by almost 10% from its highest level in 2024.

The pair’s crash is mostly because of the potential divergence between the Federal Reserve and the Bank of England (BoE). Economists expect the Fed to be more hawkish this year, while the cautious BoE will start to be more aggressive.

Recent economic numbers showed that the economy is in a stagflation period, where slow growth coincides with high inflation. The economy barely grew in the third quarter, while the headline Consumer Price Index (CPI) rose to 2.6%, while the core CPI rose to 3.3%.

The sterling could stabilize soon as the government continues to work on its fiscal situation.

EUR/USD could fall to parity

The EUR/USD exchange rate continued falling, reaching a low of 1.0215, its lowest point in over two months. It has retreated by almost 9% from its highest level in September last year.

This crash has led to concerns that the EUR/USD pair will crash to the parity level of 1.000 for the first time since November 2022.

The EUR/USD exchange rate has fallen as divergence between the Federal Reserve and the European Central Bank (ECB) continues. The Fed has hinted that it will deliver just two cuts this year, while the ECB is expected to maintain with its interest rate-cutting trajectory.

There are concerns that the European economy is slowing substantially, with countries like Germany and France seeing more deterioration. Also, there are concerns about the political instability in the region. In a note, Ignazio Angeloni, a former member of the ECB said:

The ECB is right to regard the recent inflation numbers as encouraging but not to make markets believe such low rates should prevail in the near future. Price stability, while in sight, isn’t yet secured. Even when it is, real interest rates should, in the absence of clear deflationary risks, stay above zero.

Ignazio Angeloni, former member of the ECB

USD/TRY surge continues

Meanwhile, the USD/TRY continued its strong rally and is trading at the highest point on record. It has risen to 35.50, up from almost 20% from the same period last year.

The pair’s rally continued after the latest Turkish inflation data showed that prices were moving in the right direction. According to the statistics agency, the headline Consumer Price Index (CPI) fell to 44.38% in January from last year’s high of almost 80%.

Therefore, the USD/TRY will likely continue rising as expectations that the Central Bank of the Republic of Turkey (CBRT) will continue cutting interest rates. It delivered its first rate cut in this cycle, slashing by 250 basis points to 57.5%. It also expects to be more data-dependent when determining the next rate cut.

Chinese yuan continues its downtrend

The Chinese yuan continued its downward trend, with the USD/CNY pair rising to 7.3320, its highest level since September 2023. This price action happened as China continued publishing weak economic data, which have pushed its bond yields significantly lower. The 30-year yield has plunged to 1.80%, while the 10-year moved to 1.60%.

Analysts anticipate that the People Bank of China (PBoC) will maintain its dovish tone and start cutting interest rates later this year. That is a big divergence from what the Fed is doing as it maintains a hawkish tone.

The currency has also fallen as concerns about tariffs by the Trump administration continue. Trump has pledged to impose major tariffs on China, a move that will impact its economic growth.