The European Central Bank might be edging closer to unleashing fresh stimulus but strategists say chatter of the euro hitting parity against the dollar is premature.
On Thursday, the ECB downgraded its inflation forecast and left the door open to extend and expand its bond buying program that currently stands at 60 billion euros ($66.7 billion) per month and is due to expire in September 2016.
"We're pretty confident that the ECB will be pressured to add to current easing some time in the fourth quarter," said Nizam Idris, head of strategy, fixed income and currencies at Macquarie. "The question is will they buy more per month or extend the program. I'm of the view they'll do more per month," he said.
Under this scenario, he sees the single currency heading to $1.05 by year-end – or 6 percent below its current level of $1.11.
In order for the euro to hit parity against the U.S. dollar, the ECB would need to simultaneously beef up its monthly bond purchases and extend the duration of its quantitative easing program, said Idris.
This seems unlikely unless there's a significant deterioration in the outlook for emerging market economies and the U.S. Federal Reserve signals reluctance to normalize monetary policy, he noted.
The euro has been on a roller-coaster ride this year, coming under intense pressure in the first half as concerns around Greece's debt situation reached fever pitch only to stage a recovery in August as it enjoyed relative safe-haven status amidst the turmoil in global markets.
On a year-to-date basis, however, it remains down 8 percent against the greenback.
Some strategists expect the euro will hit $1.05 this year even without the ECB stepping on the gas pedal.
Khoon Goh, senior FX strategist at ANZ expects continued dollar strength - driven by the U.S. Federal Reserve hiking rates - will be enough to see the single currency decline to that level.
"If they were to come out with an extension of the QE program and the Fed delivered a rate hike, then I wouldn't rule out a move to parity," he said.
Market players will be closely watching the U.S. nonfarm payrolls report for August due out later on Friday for additional clues on when the U.S. central bank may decide to pull the trigger on rates.
Interest rates futures markets currently indicate a higher probability for a Fed move in October and December, according to Reuters.