Investors are starting to become optimistic about recovery, and they are pushing stock markets higher, with the euro also profiting from this optimism.
The euro has gone up steadily against the dollar from May 25 to this writing. It earlier reached a three-month high of $1.1384, more than 4.5 per cent above its May 25 low, before reversing gains in London. Then it moved higher again to $1.14 on Friday, before falling back slightly on profit-taking.
The euro has also had a sharp rise against the basket of major currencies. Meanwhile the Stoxx Europe 600 index was up 1.3 per cent, and the London FTSE 100 index was up 1.1 per cent. Frankfurt’s Xetra Dax rose two per cent.
“The dollar’s decline against the euro is a clear sign of the risk-on investor stance in the markets,” comments forex analyst Han Tan of the Cyprus-based ForexTime brokerage. “The global rally powers on.”
Investors have been moving out of the dollar, dismayed by the violence unleashed after the killing of George Floyd, and the tensions with China instigated by the Trump administration.
But the stimulus actions made by the German government and by the European Central Bank have also supported the euro.
“There’s been a one-two punch in favour of the euro,” says forex analyst Yohay Elam of the FXStreet trading platform. “Less than 24 hours have passed since German Chancellor Angela Merkel announced a €130 billion stimulus plan.
And the European Central Bank has announced an increase of €600 billion to its Pandemic Emergency Purchase Program (PEPP), and it now reaches €1.35 trillion. That has exceeded most economists’ expectations. In addition, the bank said it will reinvest proceeds from this program – maintaining a large balance sheet and similar to previous schemes.”
Moreover, the bank extended the length of the PEPP to June 2021 – a year from now. The initial funds were projected to run out by the autumn.
“Nomura is long euro, short pound,” says currency analyst Jordon Rochester. “For now, it is climbing up to levels we haven’t seen since the financial crisis. Inflation in the UK pushes the pound lower, and the rest is a combination of Brexit, which investors don’t like, and the poor management of the novel coronavirus crisis.”
Nonetheless, some analysts think that the euro’s surprising rally will run out of steam. They say that it will only take some good news from the US to turn the rally around. On Friday, investors were waiting to see if unemployment numbers were rising more slowly in the non-farm payrolls announcement.
Others say that it will take more than one bad statistic to slow the euro down.
The euro could strengthen to $1.16 throughout 2020 thanks to an economic recovery in Europe, lower political risks, and no significant policy change from the European Central Bank (ECB), Nomura’s Jordon Rochester said on Friday.