Euro's Remarkable Run Goes On as the Stars Align for Europe

Updated on
  • Single currency has climbed against every G-10 peer in 2017
  • Standard Bank sees $1.40 level possible amid dollar weakness

It’s no wonder European citizens are the happiest they have been with their single currency in 13 years: As the region’s economic data impress and political risks abate, the euro is surging against just about everything.

The best performing Group-of-10 currency this year is close to breaking $1.20 -- a threshold it has not crossed since the first week of 2015 -- in a streak that could get even hotter if the European Central Bank says in autumn it will cut its bond purchases. Meanwhile, the dollar is languishing at the lowest level in two-and-a-half years against a basket of global currencies as optimism over President Donald Trump’s pro-growth agenda fades.

“You’ve got a perfect storm to hurt people who are bearish on the euro and bullish on the dollar,” Kit Juckes, a London-based strategist at Societe Generale SA, told Bloomberg Television. “How can Europe have a cheap currency if it has policy normalization and a massive current-account surplus? How can it avoid going back to those levels?” he said, referring to measures including the OECD’s purchasing power parity model, which puts the euro at $1.35.

The past year has seen a dramatic turnaround for the currency used by 19 of the European Union’s 28 member states. Trump’s election saw the dollar rally to record highs, while the risks of populist upsets in elections in France and the Netherlands loomed large. Since Emmanuel Macron’s triumph in May those political fears have been largely allayed, while economic growth in the region has rebounded.

After a blip on Tuesday the common currency strengthened 0.4 percent to $1.1851 as of 3:48 p.m. London time, on its way to a fourth weekly advance.

Chart View

The euro-Swiss franc cross has decisively broken above its 200-week moving average, which sets up the 1.20 level that was last seen before the Swiss National Bank scrapped its floor back in 2015. The cross has gained 7 percent so far this year. The 200-week moving average may offer support at 1.1236 in the event of any pullback.

Meanwhile, euro-yen is poised to break above its 200-week moving average at 130.67, which would open the door for a move toward the 134.42 long-term Fibonacci line. The cross has gained 14 percent since bottoming back in April, with bull momentum accelerating since the weekly ichimoku cloud was cleared in May. The highs in May could offer support at 125.82-81 in case the market retreats.

Here’s what strategists are saying about the rally:

Nomura International Plc

  • “A lot of people are underestimating the move we’re already seeing in euro and thinking that these are perhaps the levels where it starts to slow,” said foreign-exchange strategist Jordan Rochester in a Bloomberg Television interview.
  • If the ECB does “announce tapering and pre-announce it in September, that should be supportive for euro.”
    • “It makes more sense to be talking euro-dollar” and euro-yen, he said, and long versus the Swiss Franc.

Skandinaviska Enskilda Banken AB

  • The bank may revise its euro-dollar forecast higher if the Federal Reserve doesn’t begin to prepare markets for a September rate increase in the coming weeks, strategist Richard Falkenhall wrote in a note to clients.
    • Currently the forecast is for the euro at $1.12 in the second half of the year.
  • If expectations regarding the Fed “remain intact, EUR/USD should likely be near its peak,” making a move “much beyond $1.20” seem unlikely.

Standard Bank Group

  • “We feel it is right to be on the bull side for the euro, even if it is difficult to leave the euro-skeptic camp when it comes to issues such as fiscal union, banking union and more,” writes head of G-10 strategy Steve Barrow.
  • Barrow is targeting $1.30 over the next two years, with $1.40 “very possible after that,” despite fears over insufficient fiscal alignment and banking union in the euro zone.

Bank of America Merrill Lynch

  • The euro zone has been performing better than the U.S. this year, supporting euro-dollar, but this isn’t sustainable, Athanasios Vamvakidis, head of G-10 currency strategy, wrote in a note to clients.
    • Although momentum and room to build more positions could continue supporting the euro in the short term, the decoupling of the euro zone from the U.S. can’t continue for long.
  • The bank expects the cross to weaken by year-end.

— With assistance by Guy Johnson, Francine Lacqua, Stefania Spezzati, and Sejul Gokal

(Updates with technical analysis.)
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