Don’t bet on euro rally

An increasing number of banks see euro surging in 1Q2020 to almost $1.16. Strategists bet on Brexit resolution by the end of January 2020 as a major driver for European currency along with stabilizing economy.

ABN Amro Bank NV and Commerzbank AG are seeing euro at $1.14 by March 2020, Morgan Stanley bulls euro to $1.16 in 1Q2020. The currency is seen rising to $1.12 by March before a steady ascent to $1.16 by the end of 2020, up from around $1.1065 now, according to Bloomberg survey.

Indeed euro is seen stronger as of today with recovery signs in leading European economies. Brexit perspectives are seen much brighter while British PM Boris Jonson likely to gain a Conservative majority in Parliament on the elections Thursday 12th. 

The optimistic outlook on ECB further softening monetary policy could be disappointing. Negative rates policy is widely disputed by financial officials in Euro zone. Lowering interest rates deeper could create rather a negative effect on the financial system in Europe than gains for economy. A strategic review of ECB’s monetary policy could take longer than a few months; some unconventional measures could be enacted in the first place. ECB under Christine Lagarde’s presidency is more likely to advocate European government’s fiscal stimulus while the policymaker has a limited room to add liquidity. Lagarde is expected to continue a loose monetary policy and will hardly surprise markets this Thursday after ECB’s meeting.

European governments are more reluctant to Lagarde’s call for action on increasing investments and structural reforms.

European nations as sovereigns are addressing their own agenda and are largely divided in common interests of EU. Germany is following its own budget balance rule; political discord among Christian Democratic Union party and the Social Democratic Party fuels uncertainty; France’s Emmanuel Macron is facing national strikes against pension reform ahead of local governments elections; Italy has a large debt load and is unlikely to provide serious reforms; Spain’s healthy economy with 2% GDP growth in 2019 will hardly enable coalition government to deliver extensive growth stimulus.

EU is still lagging to complete some of the already agreed institutions like banking union, single digital market and the capital market union in Europe. Some limited reforms are to be enacted but the European governments need an extra boost to accelerate common growth-tailored reforms.

To conclude, it is likely euro will make some gains by the end of the year and months to follow. However, such gains could be limited with raising volatility amid Brexit implementation.

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