Tide turns for euro as eurozone economy looks set to pick up

The euro’s stagnant start to the year might be ending as signs emerge that Europe’s economic growth is reviving.

Traders are unwinding bets against the common currency in the options market, with a gauge of sentiment and positioning over one year now the least negative in 11 months.

Europe’s recovering economy, coupled with optimism surrounding China’s trade, will help push the euro more than 4% higher in coming months, according to UBS and Morgan Stanley.

The euro has lost ground against the dollar this year and been stuck in a range of $1.12 to $1.14 in recent months, on fears of a recession in Germany and a dovish turn by the ECB.

That has undermined the forecasts of analysts who were predicting at the start of the year the common currency would gain as policy makers removed policymaker stimulus.

“Range trading can mask an underlying build-up of pressures that get released eventually,” said UBS’ head of currency and rates strategy Themos Fiotakis.

We acknowledge the ECB’s dovishness but are inclined to see growth, in Europe and globally, as the more forward-looking and bullish driver of the euro.

Mr Fiotakis sees the eurozone’s data, such as retail sales and industrial production, as overshadowing ECB President Mario Draghi’s subdued rhetoric last week.

Signs of a tentative recovery appeared in the form of German investor confidence data, with the ZEW expectations gauge beating analyst estimates.

The euro has also shown resilience to negative news in the past week, recovering following Mr Draghi’s comments following a report that some ECB policy makers are sceptical on growth in the second half of 2019.

UBS predicts the euro will advance to $1.18 in coming months and then end the year at $1.20.

The currency traded around $1.13 yesterday, having dropped 1.5% this year. Morgan Stanley is just as bullish as UBS.

This week’s flash estimate for the eurozone Purchasing Managers Index may provide the nascent indications of an improvement in China filtering through to Europe, said strategists including Hans Redeker.

“Optimism on growth in the rest of the world rebounding should weaken the dollar and help the euro,” Mr Redeker said.

“We like buying euro-dollar this week,” he said, adding the US bank is also targeting $1.18. That is a level last touched in September.

Nordea Bank sees it breaking through that to hit $1.1650 within the next few months.

Bloomberg

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