Euro's surge prompts analysts to rethink parity with the dollar: what's next?

The euro's sharp decline following Donald Trump’s US presidential election victory last year had analysts predicting parity with the dollar.

A month ago, the single currency fell below $1.02, with investors bracing for a full-blown global trade war that could hit the Eurozone economy hardest.

However, in a dramatic turnaround, the euro has staged a strong rally this month, aided by expectations of massive fiscal stimulus from Germany.

The German government’s plan to inject hundreds of billions of euros into its military and infrastructure sectors has shifted market sentiment, boosting growth prospects for Europe.

At the same time, the US dollar has weakened amid growing concerns about the strength of the American economy.

On Friday, the euro reached as high as $1.089, its strongest level since the post-election slump, leading analysts to revise their previous parity forecasts.

“Trump’s policy backdrop has pushed Europe in a direction of far more fiscal loosening than any of us had thought,” said Adam Pickett, a multi-asset strategist at Citigroup in a report by Financial Times.

“The European Central Bank might need to cut less now.”

However, Bank of America's David Hauner says it is way too early for a "sustainable revival of the euro" as it is only in the last few weeks that investors have started entertaining the idea that the dollar will weaken, and the tide can turn with "any new headline".

Expectations of rate cuts by ECB shift as euro stabilizes

Markets have recalibrated their expectations for further rate cuts by the European Central Bank.

After Thursday’s rate reduction, traders are now fully pricing in just one more quarter-point cut this year, which would bring the deposit rate to 2.25%.

A week earlier, expectations had been for rates to fall to 2% by year-end.

Jefferies analysts argue that the euro has likely found a floor and will continue to appreciate in 2025. Brad Bechtel, an analyst at the bank in the FT report,

However, risks remain. Trump’s trade policies continue to cast a shadow over European markets.

Many investors believe that the US president could still impose tariffs on the EU, having previously claimed that the bloc "was formed to screw the United States."

EUR/USD expected to consolidate in the 1.0770-1.0850 range

As markets shift focus away from peace discussions in Saudi Arabia, attention turns to German CDU leader Friedrich Merz and his push to secure support for a €500bn infrastructure fund.

Merz is currently negotiating with the Greens, and reports suggest a key vote could take place in the Bundestag on March 18, with the Bundesrat finalizing the decision on March 21.

"Headlines on whether the Greens are playing ball this week could trigger some volatility in the euro," ING's FX analyst Chris Turner said.

On the economic front, the March Sentix Investor Confidence survey is due today, with little other major data expected this week.

Instead, market participants will closely watch European Central Bank (ECB) speakers.

Turner said while some expect the ECB to pause its easing cycle in April, the market is still pricing in 17 basis points of rate cuts for that meeting.