Foreign Exchange Parity: What Is It, Does It Matter, and Who’s Next?
What Is Foreign Exchange Parity?
Parity - the state of equality between items in the same class - is attributed to a foreign exchange rate, or pair, when a single unit of one currency is exactly equal to a single unit of the other and thus requires no multiplier. For example, EUR/USD has recently traded above and below parity - 1.0000 - resulting in 1 euro being worth more and less than 1 US dollar, respectively.
Historical EUR/USD Prices (Daily 1/1/22 to 9/23/22)
Does Foreign Exchange Parity Matter?
In theory: not really. An individual price point in a forex market, and most markets for that matter, can be just as important as another. While significant levels such as 1.0000 might be meaningful for certain market participants and thus cause a great number of buy or sell orders to be entered around them, the distance between 1.0001 and 1.0000 is the same as that between 1.2346 and 1.2345.
What Foreign Exchange Market Will Reach Parity with USD Next?
Of course, there’s no telling what the future will hold, but GBP/USD is closer to parity now than it has been in more than 30 years. The US has been more aggressive than most major economies, including the United Kingdom and Eurozone, in hiking rates, which can be reflected in the current premium of more than 0.5%, or 50 basis points, US over UK short-term rates.* All of that said, GBP/USD is still a solid $0.10 away from parity – ground that could take years to cover.
Historical GBP/USD Prices (Daily 1/1/22 to 9/23/22)
As an aside, parity is not only in play for major USD pairs; EUR/GBP is trading near year-to-date highs as the European Central Bank threatens to compete with the US and UK on interest rates. While it may not theoretically mean much, parity between three major markets such as USD, EUR, and GBP might look pretty.
Historical EUR/GBP Prices (Daily 1/1/22 to 9/23/22)
*Bank of England and US Federal Reserve rates as of 9/23/22 (Sources: https://www.bankofengland.co.uk and https://www.federalreserve.gov/monetarypolicy/files/monetary20220921a1.pdf)
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