Analysts predicted parity between the euro and dollar after Donald Trump won last year’s US Presidential election.
Investors were bracing themselves for an all-out global trade war, which could have the worst impact on the Eurozone’s economy.
The euro, however, has made a remarkable turnaround this month. This was aided in part by the expectation of a massive fiscal stimulus coming from Germany.
Market sentiment has been shifted by the German government’s plans to invest hundreds of billions in its infrastructure and military sectors. This will boost growth prospects across Europe.
The US dollar is also weakening amid concerns over the health of the American economic system.
The euro’s Friday high of $1.089 was its highest level since after the election slump. This led analysts to revise previous parity predictions.
Adam Pickett is a Citigroup multi-assets strategist. He was quoted in Financial Times as saying that Trump’s policies have pushed Europe into a much more expansive fiscal policy than anyone had anticipated.
The European Central Bank may need to reduce its cuts now.
David Hauner, a Bank of America analyst, says that it’s too soon to expect a “sustainable recovery of the euro”, as investors only began entertaining the notion that the dollar would weaken in recent weeks, and that “any new headline” could turn the tide.
As the euro stabilizes, expectations of ECB rate reductions shift.
The markets have re-evaluated their expectations of further rate reductions by the European Central Bank.
The traders have now priced in only one additional quarter-point reduction this year. This would reduce the deposit rate from 2.25% to 2%5%.
One week ago, it was expected that rates would fall to 2% at the end of the year.
Analysts at Jefferies believe that the euro is likely to have found a bottom and continue its appreciation in 2025. Brad Bechtel is an analyst from the bank who was quoted in the FT.
Most people expected a parity break in 2025, and the mood was gloomy. But now, the currency has taken off.
However, risks remain. Trump’s policies on trade continue to have a negative impact on European markets.
Investors believe the US President could impose new tariffs against the EU even though he claimed previously that the EU “was created to screw up the United States.”
EUR/USD to consolidate between 1.0770 and 1.0850
The markets are now focusing on the German CDU leader Friedrich Merz, who is pushing for support of a EUR500bn Infrastructure Fund.
Merz and the Greens are currently in negotiations. According to reports, a crucial vote may take place on the 18th of March at the Bundestag. The Bundesrat will then finalize the decision by the 21st.
Chris Turner, FX analyst at ING, said that headlines on the Greens’ play this week may cause some volatility to the euro.
Today, March Sentix Investor Confidence Survey is expected to be released. There are few other important economic data this week.
Market participants instead will be closely watching the European Central Bank’s (ECB) speeches.
Turner stated that while many expect the ECB’s easing cycle to end in April, market participants are still pricing 17 basis point rate reductions for this meeting.
The EUR/USD is likely to consolidate in the 1.0770-1.0850 area in the beginning of this week. We suspect that ECB speakers will be able to provide a further boost, or there may have been significant developments in Saudi Arabia.
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