On Wednesday (03/06/20), the Euro was up against the US dollar, marking its seventh consecutive day and the “longest winning streak since December 2013.” The euro’s surge is the result of investors moving away from the US dollar as well as news that the European Commission will be helping the Eurozone economy with a 750 billion euro ($826.5 billion) fund to ease the damage from the pandemic.

The Euro had a roller coaster ride the last few years. Recently, due to slower economic growth, the Euro has dropped, but there have been signs of increase as the Covid-19 pandemic hit financial markets and investors turned towards the safety of government bonds. But soon it fell again, as investors turned to safe-haven assets such as the US dollar. Since mid-March, the euro has been at its highest after the significant decrease of new coronavirus cases in the EU.

With the continued uncertainty due to the coronavirus pandemic and the ongoing Brexit negotiations, the Euro will remain sensitive. But let’s see what the main drivers of the euro in the coming months are.

Key Drivers of the Euro

Apart from the coronavirus pandemic and Brexit updates, the Euro is sensitive to releases of macroeconomic data including GDP, unemployment rates, manufacturing and services output and consumer price indices which measure the Eurozone economy’s health. Significant events such as meetings of the European Central Bank (ECB) and updates regarding policy on interest rates and fiscal stimulus, can also impact on the single currency. For example, low interest rates are unattractive to investors.

If the US Dollar rises, as the US economy strengthens and interest rates are increased by the Federal Reserve, then this will weigh on the Euro. There are also dangers from weaker global growth and a slowing of the EU member states’ economies, especially the German economy.

Last but not least, if the Chinese economy slows and China’s trade is reduced, then there will be less demand for European imports.

European Commission forecast for the Eurozone economy

In its Spring 2020 Economic Forecast, the European Commission reported that the coronavirus pandemic will have “very severe socio-economic consequences” for the global and EU economies. It has forecast that “the euro area economy will contract by a record 7¾% in 2020 and grow by 6¼% in 2021. The EU economy is forecast to contract by 7½% in 2020 and grow by around 6% in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the Autumn 2019 Economic Forecast.”

Paolo Gentiloni, European Commissioner for the Economy, said: “Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country's financial resources. Such divergence poses a threat to the single market and the euro area - yet it can be mitigated through decisive, joint European action. We must rise to this challenge.”

Economists’ Predictions in the near- and long-term

According to Citibank, “Second waves of crisis, trade wars and the ECB’s future reaction will likely keep EUR soft near term and upside capped medium term despite a lot of bad news in the price.”

In the long-term, analysts at CIBC expect the Euro to rise: “While euro sentiment remains compromised by the lack of political coherence, we’ve seen the ECB taking action by expanding its balance sheet. However, that move has been dwarfed by the additional supply of USD currently being injected into the market, which remains supportive for the EUR/USD pair.” They added that positive fund flows as a result of the Eurozone current account surplus will benefit the euro, despite political uncertainty.

Natixis Research expects Eurozone inflation to return in 2021 due to the “decline in productivity and the increase in unit production costs due to the new health standards taken because of the coronavirus pandemic.” In turn, the increase in inflation will lead to a rise in long-term interest rates which will support the euro.

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