EUR/USD is on its way to below 1.20

EUR/USD is on its way to below 1.20 for the first time in a decade, projects SocGen.

"Transatlantic monetary policy divergence is making its presence felt, with negative ECB deposit rates particularly potent when it comes to driving money out of the euro. A weaker currency will also be the main impact of ECB sovereign QE in Q1," SocGen adds.

Specifically, SocGen expect the EUR/USD to fall to 1.14 in 2015.

So why not to parity? Will it collapse after?

"...Arguably, the Rates/FX link has been re-established after a troubling break at the turn of 2013-2014. EUR/USD is even overshooting to the downside and that is how it should be now that the ECB plans a bolder expansion of its balance sheet," SocGen adds.

Nevertheless SocGen still expects EUR/USD downside to be limited by three factors:

1- Large currency moves would make the Fed more cautious. That should be a selfcorrecting mechanism.

2- Positioning is already extreme, which should limit EUR downside.

3- The euro’s basic balance (current account, portfolio flows, FDI) has reached new record highs, at some €370bn over the past 12 months...Historically, that has been a strong driver of the euro . This no longer holds true but can’t be ignored entirely.