Morgan Stanley expects the euro to fall close to parity with the US dollar within a few months as the ECB steps up its easing policy to deal with the faltering economy.

David Adams (David Adams), head of G10 foreign exchange strategy at the bank, said in an interview that the euro is expected to fall to 1.02 against the US dollar by the end of the year, depreciating about 7% from current levels. This basic scenario depends on the ECB continuing to cut interest rates for the remaining three meetings of the year, and the possibility of cutting interest rates sharply by 50 basis points.

Among forex analysts surveyed by Bloomberg, this bearish forecast was the most pessimistic. Others generally expect EUR/USD to rise to 1.11 by the end of the year. The ECB is expected to cut interest rates by 25 basis points at this Thursday's meeting, and traders' attention is focused on the outlook for the next few months.

Adams, who worked for the New York Federal Reserve, said, “The market has a lot of room to refocus on the fact that the ECB may cut interest rates faster and more violently than current market pricing. This week's conference could be an important catalyst for the market to start considering this issue.”

The foreign exchange market is currently betting that the ECB will cut interest rates by about 60 basis points this year, while the price of the Federal Reserve's interest rate cut during the year is as high as 110 basis points. London-based Adams believes there is room for traders to increase their bets on interest rate cuts on the ECB to absorb the risk of similar interest rate cuts of 50 basis points.

As the ECB meeting is about to be held, the optimism of options traders about the outlook for the euro has waned, and premiums holding exposure to the euro's upward risk next week narrowed on Monday.

Since February, Adams has been recommending shorting EURUSD options positions because he believes the November US election may boost the dollar. Rising political uncertainty in Europe has now increased his belief in the euro's downtrend.

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

He said, “At a time when economic growth is slowing, political risk premiums and uncertainties are rising. Both factors suggest investors are reluctant to deploy capital in the region.”

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