EUR: European defence spending narrative looks overblown – ING
EUR/USD had a decent rally yesterday as investors focused on the explosive rally in European defence stocks. That Europe needs to spend a lot more on defence now is not in doubt. The question is what does it mean for FX? Can European defence spending move the needle on European growth and curtail some of the ECB easing cycle? This are the questions, ING's FX analyst Chris Turner asks.
Spike through resistance at 1.0535/50 isn't sustainable
"Our eurozone economic team doubts defence spending will have a significant impact on European growth prospects. After all, Germany has only spent around a quarter of its EUR100bn Special Defence Fund established in 2022 after the Russian invasion of Ukraine. We certainly don't want to stand in the way of the rally of European defence stocks nor the steepening in European government bond curves, but we do have our doubts about the merits of buying the euro on this narrative."
"Instead, it has largely been the softening of US data and the repricing of Fed expectations that have driven EUR/USD higher. Here the Atlantic two-year spread has narrowed a staggering 35bps in less than a month, entirely driven by the re-pricing of the Fed. Whether this narrows any further may be a function of how US equities react to the tariff news."
"EUR/USD is a tough call at the moment, but looming tariffs are a real threat to an open economy such as the eurozone. And if EUR/USD were to spike through resistance at 1.0535/50 for some reason, we doubt such a rally would be sustainable."
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FXStreet Insights Team
FXStreet
The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.
