Bank of America warns of a worst-case scenario of stagflation, a combination of economic stagnation and inflation, which it sees as not unlikely and which could potentially drive the EUR/USD exchange rate to parity.
Key Points:
1. Stagflation Scenario: BofA has identified a potential risk scenario involving a few months of increasing unemployment combined with persistent or even increasing inflation. This situation is particularly concerning because unemployment is currently much lower than the natural rate, so even if the labor market weakens, it could take some time for inflation to decrease.
2. Impact on Risk and USD: This stagflation scenario is highly negative for risk and highly positive for the US dollar. Central banks would be forced to maintain high rates despite a weakening economy. The longer this scenario continues, the greater the risk of a significant event leading to an eventual break from stagflation.
3. Potential for EUR/USD Parity: If this stagflation scenario materializes, BofA foresees a possibility that the EUR/USD exchange rate could fall back to parity.
This is via the folks at eFX.
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Weekly EUR/USD chart showing the last time EUR/USD was at, and under, 1.00:
