Nineteen Heads better than One? Euro for a bull run?

The week has started with plenty to cheer about for Euro bulls. Following the final round of French parliamentary elections Emmanuel Macron's En Marche party, alongside its allies, has gained 350 seats, a majority of 138. European markets have reacted positively, and the Euro has climbed against the Dollar, as high as $1.12115. Sentiment around the Eurozone is consistently trending upwards, given events elsewhere, including an eroding belief in President Trump's ability to push through reforms, and Britain's uncertain economic prospects. This is quite the turnaround, given that for some time the question has been how low can the Euro go, with predictions of parity with the dollar not unheard of. For the moment at least, this question has been turned upside down. The question now being posed is whether taking a long position on the Euro might present the possibility of significant gains, especially should it seem possible that the European currency might reach the $1.20 threshold. 

French Vote

With markets buoyed, and plenty of positive news emanating from the Eurozone in general, from French construction figures rising by 3.5%, to overall EU construction output rising month-on-month, to the immediate post-election bump in the French stock exchange, the Eurozone looks far less a basket case than it has for some time. That said, whilst Macron's now extremely likely labour and pension reforms are necessary, expected, and certain to boost French productivity, and even potentially spur, as Elliot Hentov of State Street Global Advisers suggests, potentially audacious Eurozone reform, in real terms much of the bounce in sentiment around the Eurozone relies on the combination of Europe not making quite so many unforced errors as has hitherto been usual, and other major currencies suffering from precisely the opposite scenario. After eight years of the steady hand of Obama, and several of the laissez faire Cameron, markets initially responded positively to their replacements, yet they are now in the process of digesting the fact that the heads of both the U.S. and British economies are prone to gaffes and U-turns, and are unlikely to be able to push through with many of their more market pleasing policies. Trump's infrastructure plans appear to have foundered, whilst an extraordinarily small majority has rendered Ms. May in many ways a lame-duck since election day. Trump is becoming ever more embroiled in political scandal, whilst May is likely to spend the duration of her premiership in thrall to narrow backbench interests, as the political tail wags the dog. For Euro bulls all of this is excellent news. The EU, with a reputation for muddling through, rather than setting the bar, looks a lot more attractive when the alternatives are what they are. It is no surprise that many prefer the strength and calm of Merkel and the modern insouciance of Macron over the dated May and blustering Trump. 


The reasons for pro-European sentiment can now then be understood as a mixture of better the devil who gets something done, and genuinely positive developments in the EU, from Macron's likely reforms, to greater political stability, declining unemployment, with figures finally surpassing the pre-recession peaks, a quarterly GDP rise of 0.5%, PMI sentiment from IHS Markit at six year highs, increasing domestic spending, Greek negotiations running smoothly for a change, and investment steadily climbing. The major Eurozone economies of France, Germany, Italy, and Spain, grew by 0.55 on average in the past quarter, and yearly EU GDP was up 2.1% over the past year, with Jessica Hinds, of Capital Economics, amongst others, predicting 2017 GDP rises of a further 2%. This presents a situation where there is plenty to be bullish about. 


How high then is the Euro likely to climb against the Dollar, with the current Dollar surge seemingly at an end? The U.S. faces significant headwinds, and plenty of near-term negative sentiment, and since Trump's “phenomenal” tax reforms and infrastructure spend is ever more a chimera, what was once priced in needs to be priced out. The present exchange rate of around $1.12 to the Euro, does therefore look like moving further in favour of the European currency. Analysts are mixed in their predictions of how far the Euro might climb, with some, like HSBC, suggesting that $1.20 by the end of 2017 is a reasonable target. Others, including Nomura, predict a safer, but nonetheless significant upswing to $1.15. On current sentiment alone, Nomura's prediction looks probable, yet when added to the likelihood that the ECB is expected to begin unwinding their ultra-loose policy approach, and the fact that the U.S. is likely to hold off on any further Dollar positive policies it can actually pass, given that the strength of USD has been a drag on trade of late, HSBC's $1.20, while a bullish forecast, does stand some chance of becoming a reality. Indeed, in terms of PPP (Purchasing Power Parity) the Euro appears to be distinctly undervalued against the Dollar. There may therefore be plenty of scope for a rise in the Euro's value.


Going long on the Euro, given the fact that the Eurozone, in a tight spot, can seem like a many headed Hydra fighting with itself, instead of facing down challenges, is always a little risky, and caution can seem prudent, yet with far greater uncertainty surrounding certain other major Western currencies, it might just be worth taking a position. With end of 2017 EURUSD predictions ranging from Nomura's aforementioned $1.15 (+3%), Danske Bank's $1.18 (+5%), HSBC's $1.20 (+7%), and even some far more bullish forecasts, like Oliver Corbier of Société Générale's $1.30 (+14%), there is certainly some strength to the argument of the Euro bull. 

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