Morgan Stanley predicts that as the European Central Bank increases its loose policy to cope with the sluggish economy, the euro will fall to near parity with the US dollar in a few months.

David Adams, the head of G10 forex strategy at the bank, said in an interview that he expects the euro to fall to 1.02 against the US dollar by the end of the year, a depreciation of about 7% from current levels. This scenario depends on the European Central Bank continuing to cut interest rates at its remaining three meetings this year and the possibility of a 50 basis point cut.

Among the forex analysts surveyed by Bloomberg, this bearish forecast is the most pessimistic. Others generally expect the euro to rise to 1.11 against the US dollar by the end of the year. The focus of traders is on the outlook for the coming months as the European Central Bank is expected to cut interest rates by 25 basis points at its meeting this Thursday.

Adams, who previously worked at the New York Fed, said, "There is a lot of room in the market to refocus on the fact that the European Central Bank may cut interest rates faster and more aggressively than the current market pricing. This week's meeting could be an important catalyst for the market to start considering this issue."

The forex market is currently betting that the European Central Bank will cut interest rates by about 60 basis points this year, while pricing for the magnitude of interest rate cuts by the Federal Reserve is as high as 110 basis points. Adams, based in London, believes that traders have room to increase their bets on interest rate cuts by the European Central Bank to digest the risk of a similar 50 basis point cut.

As the European Central Bank meeting approaches, options traders' optimistic sentiment about the euro's outlook has weakened, narrowing the premium for holding upside risk exposure to the euro next week.

Since February, Adams has been recommending a short position on euro-dollar options because he believes the US presidential election in November could boost the US dollar. The rising uncertainty in European politics has now increased his belief in the downward trend of the euro.

Although French politics has been the focus of attention in recent months, Adam also believes that the political development in Germany is closely related to the long-term political stability of the region.

He said, 'Amid slowing economic growth, political risk premium and uncertainty are on the rise. Both of these factors indicate that investors are not very willing to deploy capital in the region.'

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