With increasing concerns about the deteriorating economic outlook in the eurozone, the risk of the euro falling to parity against the US dollar is rising. The preliminary value of the eurozone Purchasing Managers' Index (PMI) for November released last Friday was well below expectations, causing the euro to fall to a two-year low of $1.0336 against the dollar. PMI measures the activity levels in manufacturing and services sectors.

Investors are becoming increasingly worried about the potentially destructive impact of the trade tariff measures proposed by US President-elect Trump on the export-oriented eurozone economy, as well as the escalating tension between Russia and Ukraine. The European Central Bank seems likely to cut interest rates further. All these are bad news for the euro. Over the past two months, the euro has depreciated by nearly 8% against the dollar.

Harry Woolman, a partner at Validus Risk Management, said last Friday: 'With the possibility of the protectionist Trump administration imposing tariffs and the ongoing economic weakness in the eurozone, we are likely to see the euro testing parity levels again.' He added that the European Central Bank may face increasing pressure to make a significant rate cut of 0.5 percentage points in December.

The current market believes there is a 62% chance of the European Central Bank cutting interest rates by 0.5 percentage points in December. According to data from LSEG Data & Analytics, it is expected that by the end of 2025, the European Central Bank will have reduced rates by a total of 150 basis points. This stands in stark contrast to expectations for the Fed. The market expects the Fed to cut rates by 0.7 percentage points by the end of 2025.

Dominic Schnider, Global Head of Forex and Commodity at UBS Group Global Wealth Management, mentioned that the widening interest rate differentials between the eurozone and the USA could further drag down the euro.