Global Euro moment may face political roadblock – ING

The Euro has come through the US tariff scare with barely a scratch. As discussed above, markets’ tendency to punish the dollar when trade tensions escalate means a rotation to the liquid Euro often prevents the idiosyncratic risks for the Eurozone from being priced in. EUR/USD touched 1.1420 on Monday before drifting just below 1.140. With normal trading volumes returning, the pair could inch higher again today, ING’s FX analyst Francesco Pesole notes.

Political fragmentation in Europe remains a headwind

“European Central Bank President Christine Lagarde’s comments yesterday were notable – she talked about a potential ‘global Euro moment,’ arguing that coordinated government action could boost the Euro’s international role. Part of the recent overvaluation in EUR/USD likely reflects this narrative. If European policymakers continue to push the idea, we could see strategic long positions in the Euro build even faster. Lagarde’s enthusiasm is understandable; a stronger, more global Euro supports bond market stability and keeps rates lower, while nominal appreciation helps cap inflation. But exporters are already voicing concerns about the strong Euro, and national governments, especially those with stronger finances, may be less keen, as they already enjoy low borrowing costs.”

“A currency’s global appeal hinges on the depth of its bond market. Competing with the dollar would mean the Euro needs a reliable plan for continuous common EU debt issuance, not just occasional moves like for the pandemic response. Political fragmentation in Europe also remains a headwind to the grander ambitions for the Euro’s global role, so we’d caution against too much optimism on that front. Still, any serious moves in this direction would likely push EUR/USD even higher.”

“Upside potential for EUR/USD following the recent deficit concerns in the US is likely to extend to 1.150. At that level, markets would, however, require additional catalysts to stay long the pair. Our view remains that EUR/USD will ultimately settle back around 1.130 by the end of June.”