Turning point or approaching! Will the interest rate cut bet soar soon?

Morgan Stanley expects that as the European Central Bank intensifies its loose policy to cope with the sluggish economy, the euro will fall to near parity with the dollar in the coming months.

David Adams, the G10 foreign exchange strategist at the bank, said in an interview that the euro is expected to fall to 1.02 against the dollar by the end of the year, depreciating by about 7% from current levels. This scenario depends on the European Central Bank continuing to cut interest rates at the remaining three meetings this year, with a possibility of a significant 50 basis point cut.

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

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

The foreign exchange market is currently betting that the European Central Bank will cut rates by about 60 basis points this year, while pricing for the Fed's rate cuts is around 110 basis points. Adams, based in London, believes that traders have room to increase their bets on the European Central Bank's rate cuts to absorb the risk of a similar 50 basis point cut.

As the European Central Bank meeting approaches, options traders' optimism about the euro's outlook has waned, with the premium for holding upside risk exposure for the euro next week narrowing on Monday.

Euro falls from year-to-date high

Since February, Adams has been recommending short euro-dollar option positions, as he believes the November U.S. election could boost the dollar. The rising political uncertainty in Europe has now increased his conviction in the downward trend of the euro.

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

He said, " Political risk premiums and uncertainty are rising at a time of slowing economic growth. Both factors indicate that investors are less willing to deploy capital in the region."