We’re betting on the euro as we believe that the EURUSD currency pair is set to continue its growth for the foreseeable future. As we see it, there are 7 reasons for this:
1. The ECB has hinted at a change in monetary policy. The head of the European Central Bank, Mario Draghi, has recently said that the Eurozone’s economy is starting to recover and that investment is growing, which are good reasons for normalising monetary policy. Markets have apparently interpreted this as a step towards curtailing the quantitative easing program and as a sign of a hike in interest rates, which are currently at zero.
2. The Eurozone is transitioning from deflation to moderate inflation. According to a Eurostat report, inflation in the Eurozone in June rose by 1.3%. Markets were expecting a jump of only 1.2%. We can now say with confidence that deflation no longer poses a threat to the Eurozone’s economy, which is another argument in favour of a growing euro.
3. Brexit is going relatively smoothly. Despite all the negative forecasts, Britain’s process of leaving the EU has got off to a comfortable start. With Britain committed to leaving, the UK and EU have both shown willingness to compromise in dealing with difficult issues.
4. Eurosceptics are on time out for now. The recent presidential and parliamentary elections in France have shown that eurocentrist parties can stay in power by finding a common language with voters of eurosceptic parties. Now, other potential “exits” from the EU have been put on hold. This is another positive for the euro.
5. Leadership will remain in Europe at the upcoming G20 summit. On the 7-8th of July, the world’s 20 largest economies will convene in Hamburg. This will be interesting, first of all, because of the first meeting between the presidents of Russia and the US. However, a routine meeting is unlikely to lead to official talks. At the same time, the global community’s attention will be turned towards the newly-elected French president, Emmanuel Macron, who considers himself a promising politician and potential future leader of a United States of Europe, as well as towards German chancellor Angela Merkel, who has a renewed image bordering on Euroscepticism. This could spark some short-term interest in the euro.
6. Risks for the dollar are growing. In her recent address, Federal Reserve Chair Janet Yellen warned that the prices of US financial assets are inflated. Markets interpreted this as a sign that the regulator may delay the next hike in interest rates, which would weaken the dollar against other currencies around the world. Accordingly, risks to the dollar are growing, while risks to the euro are falling in light of Draghi’s recent speech, which was diametrically opposed to Yellen’s.
7. The euro could hit new highs. At the moment, the EURUSD pair is trading at around the same level it was in February 2015. By Friday’s close, the pair had corrected slightly downwards, which might be considered a good time to buy. The target for the euro/dollar pair is 1.145-1.15.