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Jason Schenker

Euro's Short Squeeze May Just Be Getting Started

For traders, the downside isn’t the biggest risk to the shared currency, but rather the potential for further appreciation.
Defying skeptics

Defying skeptics

Photographer: Matt Cardy

The euro has had an impressive rally since mid-April, including a surge last week that took it to its highest level against the dollar since May 2016. The logical question now is whether the run is over, especially after the currency’s softness this week in the face of some strong euro-zone economic data. Based on market fundamentals that have led analysts to rethink their pessimistic views and technicals that convey corporate hedging strategies, the euro is likely to strengthen further. 

Fundamentals have been supportive for the euro since the beginning of 2017, when many analysts were calling for the currency to weaken to parity with the dollar. Currently, the euro-area inflation rate is 1.3 percent, but it was around 2 percent for a few months earlier this year. And growth in the euro zone looks strong, with the Ifo index, a leading indicator of overall German GDP, rising to an all-time high in June. Plus, the euro-zone manufacturing purchasing managers index, which is a critical leading indicator of growth, rose in June to the highest level since April 2011. The June reading also showed a 48th monthly consecutive expansion.

So, despite the schadenfreude shorts that U.S. traders have had on the euro, the euro-zone economy has now expanded for four full years, without a single monthly contraction. As a point of contrast, the last time the U.S. ISM manufacturing index contracted was less than a year ago, in August. And there have been contractions in six of the last 24 months for that indicator.