When President Trump won the US election, the euro fell, and it looked like it was heading to 1 to 1 or parity with the US dollar. Tariff fears were hammering economic sentiment. Political uncertainty was present; France was in the middle of political crisis and Germany was heading to a contentious election.
Add to that very low interest rates, meaning you received little investment return on an asset that had political risk, and it is astonishing the euro bounced off its post-US election bottom. These forces should have taken the Euro down to parity, and perhaps beyond.
But they didn’t.
Euro resilience can be explained by improving economic and stock market sentiment in Germany, of all places. Pre-its election, Germany’s February sentiment index rose 6.2 points from January to February, hitting its highest level in seven months. After a stumble post the election of President Trump, the German stock market raced ahead, outperforming the US market by double digits from the US election to now.
Any German economic improvement will support the Euro. After all, Germany is the Euro’s largest economy.
Right now, Germany is positioned to further help the Euro trajectory medium term through Increased government spending and borrowing.
It seems strange that Germany has room to borrow and spend when major economies like France, the UK, and the US are facing fiscal uncertainties.
But they do.
German debt is only 69% of GDP, and there is a debt brake enshrined in the constitution that the deficit is limited to .3% of GDP per year. This spending limit can be relaxed during a time of emergency, which happened during COVID.
So, the question is …Is this a time of emergency?
Many in Germany will say yes.
Here’s why.
There is infrastructure that needs to be replaced for Germany to continue being an economic powerhouse.
The economy must be strong to stave off the tariffs from the US.
The population is ticked off at lackluster economic growth.
More money must be spent on defense since the US is backing away from financial commitments, putting more responsibility on Europe’ shoulders.
Tariffs, loss of defense funding, and an upset population combined could define an emergency.
Short-term there are still strong headwinds against the euro going up in value, but the prospects of Germany economic growth will probably keep the euro from nearing parity.
So, in conclusion, there seems to be a limited downside, and possible medium-term upside in the euro at present.
Given the limited downside and potential appreciation, now may be the time to take exposure to European bonds. The interest rate is not great, but the currency should hold its value and there the upside from Germany’s next potential economic miracle.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
