Although the EUR/USD equilibrium estimate is 1.16, the estimate drops to below parity if we take into account the large difference in the output gaps between the Eurozone and the US.
The Eurozone inflation risks remain to the downside compared with the US. Even though the ECB disappointed in December, it is not expected to stop QE before inflation is on a clear path towards their target. Rate differentials and aggregate data point to a weaker Euro. And the PBOC is expected to be more willing to accept a weaker Euro, as it allows more CNY flexibility.
"We remain EUR bears beyond the short term and expect EUR/USD to weaken to 0.95 by the end of 2016", says BofA Merrill Lynch.
