Wall Street Believes the Euro Rally is Just Getting Started

With energy prices tumbling and calls for a region-wide recession falling to the wayside, a clear narrative is emerging that the worst of the economic damage is over and European assets are cheap. 

Deutsche Bank AG and Morgan Stanley strategists say the euro can rally to $1.15, up from the current seven-month high of $1.07. Nomura International Plc is forecasting a rise to $1.10 by the end of the month, while Aegon Asset Management’s Gareth Gettinby is planning to add to his position in the currency. 

“We got the miracle weather,” said Mark McCormick, an FX strategist at TD Securities in an interview with Bloomberg Television. “That was a very good cushion to get the Eurozone past this recession.”

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It’s a dramatic change in sentiment compared with 2022, when the euro tumbled to parity against the dollar. Mild temperatures across the continent have taken the catastrophic economic scenarios off the table, giving investors the confidence to return. 

Trends outside of Europe also support the bullish thesis. Many investors are expecting weakness in the dollar, especially if US inflation softens and the Federal Reserve approaches the end of its tightening cycle. The rapid pace of China’s re-opening is also seen helping the European economy as supply chain disruptions ease.

“The downside risks to the euro are diminishing with lower gas prices,” said Gettinby, a portfolio manager at Aegon. “European economic surprises continue to strengthen, while in the US, these are declining.” 

The gains are widespread across the region. The Stoxx 600 Index has rallied 5% so far this year, and the extra yield investors demand to hold Europe’s riskier debt has been falling since mid-October. 

For bears, there are still worries that Russia could intensify its assault in Ukraine and persistently high energy prices may hobble growth. Stronger inflation or economic data in the US could also trigger another bout of dollar strength at the euro’s expense if the Fed sticks with an aggressive stance.

For JPMorgan Chase & Co. strategists, they’re still wary about the economy’s trajectory, but argue that a more hawkish European Central Bank will support the euro. The bank recently switched its stance to neutral for the first time in months from bearish. 

Money markets indicate that the ECB will tighten by about 150 basis points this year, while the Fed is expected to deliver 60 basis points. Traders will be looking to the latest US inflation data Thursday for further evidence price pressures are waning.

“The pieces are falling in to place for a more sustained downturn in the dollar,” wrote George Saravelos, head of foreign-exchange research at Deutsche Bank, in a note that laid out his positive stance on the euro. 

“Two key drivers of the dollar’s safe-haven appeal – Europe’s energy shock and China’s zero Covid policy – have turned.” he added. “Ultimately, a Fed pivot is the last missing link.”

–With assistance from Jana Randow.