Euro grows in strength as investors turn bullish on the currency

The euro rallied to a two-month high against the US dollar on Friday and derivatives markets sent a signal that investors had turned positive on the currency’s prospects for the first time since March.

The euro traded near its strongest since March 27 at US$1.1144 on Friday, up 0.6 per cent on the day after growing confidence in European coronavirus recovery proposals sparked a bounce in the currency. In derivatives markets, it has become more expensive to bet that the euro would rise against the US dollar over the next month than to bet that it would slide, signalling that the number of investors who expect the currency to make gains now outstrips bearish traders for the first time since March 12.

“There is no doubt that the positive sentiment around the euro recovery plan is in good part behind this move,” said Ugo Lancioni, head of global currency at Neuberger Berman. “I suspect that few investors expected this outcome.”

European Commission president Ursula von der Leyen announced proposals on Wednesday for a 750 billion ($1.3 trillion) fund to support coronavirus recovery efforts. The euro popped higher on the news and broke through US$1.10, but gains accelerated at the end of the week.

“Nothing is done yet and we will have to wait for June or the summer to get more clarity,” Lancioni added.

The brighter tone marks a turnaround for the euro’s exchange rate. Earlier this month, some analysts and investors were turning more pessimistic, noting a ruling by Germany’s constitutional court that challenged the European Central Bank’s purchases of government bonds. At that point, the currency was trading at about US$1.07.

That meant that when the latest proposals for funding the economic support efforts first emerged, investors were still reluctant to shift into the euro. “Many folks still had doubts whether it will go through as outlined,” said Jordan Rochester, a currency strategist at Nomura.

But confidence is building — a shift that is clear in Italy’s government bond market. “The existential tail risk of a eurozone break-up has fallen,” said Dominic Bunning, senior currency strategist at HSBC.

Still, few analysts expect the euro to make further large gains until the proposals near approval. Bunning expects the euro to finish the year at US$1.10, lifting his estimate from US$1.05 previously.