Europe | Tailwinds for the euro

Summary

The tables have recently turned for the common European currency as it once again moves toward appreciation. Following the period of weakness it experienced earlier this year, the euro has appreciated by over 3.5% so far this quarter, exceeding 1.22. This appreciation occurred earlier than expected.

Key points

• Key points:
• The recent improvement in economic data in the Eurozone, combined with the increasing rate of vaccination, has contributed to this strength. In parallel, the reduction in the debt yield spread between Germany and the United States has paved the way for this to occur.
• On the one hand, investors are turning toward European asset markets at the same time confidence in a Eurozone recovery is intensifying.
• On the other, the strength of the dollar during the first quarter of this year seems to be disappearing, and the currency is no longer reacting as positively to strong data from the United States.
• Once the end of the COVID-19 crisis is closer and recovery is underway, the key will be its consolidation and the way in which the two large central banks—the Federal Reserve (Fed) and the European Central Bank (ECB)—begin to reverse their expansionary policies, as well as the time at which they begin to reduce asset purchases.
• In 2022, we expect the euro to continue appreciating very gradually relative to the dollar toward long-term equilibrium levels, which could be around 1.25.

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