EUR/USD price analysis: is euro-dollar parity in play?

Key points

• EUR/USD is down 200 pips from recent highs
• Euro-dollar was particularly rangebound in 2023 - staying between 1.0500 and 1.1200
• US Treasury yields have bounced back, driving USD demand

Where next for EUR/USD

The past year has seen the euro-dollar (EUR/USD) confined within a range, generally touching lows around 1.0500 and highs around 1.1200. This has presented numerous opportunities for active traders, particularly those who employ swing or trend-following strategies. When the pair breaks above 1.10, these traders might ride the momentum to levels such as 1.11 or 1.12. Conversely, a dip below 1.08 could signal a potential downward trajectory to capitalize on.

However, this environment is less favorable for passive traders who prefer to invest in anticipation of significant one-directional movements. Since 2022, the market has not revisited the extreme levels of parity or above 1.20, which were more common in pre-pandemic times.

The interplay between the euro and US dollar is heavily influenced by interest rates and inflation rates in their respective economies. For instance, a decline in US rates from highs of 4.5-5.5% by 50-100 basis points corresponded with a rise in the euro-dollar above 1.10. Conversely, a rebound in Treasury yields at the start of 2024 has been associated with a strengthening US dollar and a weaker euro.

Forex traders must also consider the actions of central banks, such as the European Central Bank (ECB) and the Federal Reserve (Fed). The ECB's commitment to maintain restrictive rates contrasts with the Fed's openness to rate cuts if inflation decreases. These differing stances can significantly impact currency valuations.

Historically, the gap in interest rates between the US and the Eurozone has been a driver for forex demand. Currently, US rates are around 5.5%, while Eurozone rates are at 4.5%, a narrower gap than in the past. Should the ECB cut rates before the US, the Euro could weaken, potentially leading to parity. On the other hand, if the US cuts rates first, the euro could strengthen, potentially revisiting its previous highs.

Market predictions, such as those from the CME Group's futures options, currently place a low probability on the euro reaching parity by September. Yet, as traders know, markets are dynamic and probabilities can change rapidly, as evidenced by recent shifts in interest rate cut expectations.

In conclusion, EUR/USD remains a focal point for traders. Its current position suggests an inflection point, with the potential to either revisit parity or ascend to previous highs. Traders must stay vigilant, closely monitoring interest rate differentials and central bank policies, which are key drivers of the currency pair's movements. Whether through range trading or positioning for a breakout, there are opportunities for both active and passive traders in the ever-changing landscape of the Forex market.

How to trade EUR/USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on EUR/USD

Trading forex requires an account with a forex broker like tastyfx. EUR/USD can be found in the "Major" pairs tab. Many traders watch other major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.