As the USA prepares for the return of former President Trump, the Forex market is also preparing for a rare event: the Euro reaching parity with the US Dollar.

Strategists from banks like Bank of New York Mellon and Mizuho believe this could happen later this month after Trump's inauguration.

Since late September last year, the Euro has fallen by more than 7% against the US Dollar, reaching 1.0226 last week, the lowest level in over two years. The Options market implies there is about a 40% chance that this currency pair will reach parity this quarter, with a surge in contracts targeting that level last week.

The market is focusing on the consequences of Trump's inauguration as president on January 20, looking for potential catalysts. Bank of New York Mellon and Mizuho Bank anticipate that Europe will become a potential victim of the trade war, and differing growth expectations between Europe and the USA may lead to a rare strong performance of the dollar not seen in 20 years. Both banks believe that the euro to dollar exchange rate will trend toward parity as early as this month.

Geoffrey Yu, a senior strategist at Bank of New York Mellon, stated, "The euro is not far from parity with the dollar, and this could happen soon." He expects Put sentiment on the euro to peak around the Federal Reserve and European Central Bank meetings at the end of January, "(The euro to dollar) parity is unavoidable."

Since the Euro's introduction in 1999, instances of Euro-USD parity have been few, often indicating a relatively poor economic environment in Europe compared to the USA. The last time the Euro was at parity with the US Dollar was in 2022, when the Russia-Ukraine conflict sparked an Energy crisis in Europe and concerns about recession.

Currently, Europe's Energy supply and security remain concerning, highlighted by last week's suspension of Russian gas transit through Ukraine to Europe.

Europe's export-oriented economies are currently struggling to cope with the threat of US trade tariffs, which is reflected in expectations that the European Central Bank will have to significantly cut interest rates, contrasting sharply with the outlook of the Federal Reserve slowing its rate cuts. The political instability of Europe's largest economy has also intensified the pressure.

Antony Foster, head of G-10 Forex spot trading at Nomura Securities, stated, "Sentiment has become very bad." He believes that if Trump implements tariffs shortly after taking office, January 20 could be a catalyst for further weakening of the euro.

Despite the euro rebounding this week against a generally weak dollar, and reports that options traders have given up on parity bets for the euro against the dollar, large Banks like JPMorgan indicate the euro may still be at parity with the dollar this quarter. Wells Fargo & Co believes this threshold is more likely to be reached in the second quarter.

Jane Foley, head of forex strategy at Rabobank, thinks that whether the euro/dollar falls to parity largely depends on whether the market can further confirm the benign inflation trend to support the European Central Bank's more aggressive rate cuts. Inflation data from Europe will be released this week, and current data shows that inflation growth in Germany and France in December last year exceeded expectations.

The European Central Bank is expected to lower its deposit rate to 2.75% at the next meeting, while the Federal Reserve is expected to maintain rates in the range of 4.25% to 4.5%, highlighting the growing divergence in their monetary policies. The oversight by Bank of New York Mellon over assets exceeding $50 trillion indicates that the euro has reached its most undervalued level in 20 years.

"How can anyone be bullish on the euro?" Foster of Nomura asked.