Germany, Europe's largest economy, is on track for its fastest expansion since 2011 after quarterly GDP growth accelerated to 0.8% in the third quarter. Equally promising is the fact that other Eurozone nations have recently been catching up. Growth rate gaps between them have narrowed to the smallest margin in the region’s history. This economic strength, along with the Eurozone's current account surplus, should push the euro toward 1.25 against the US dollar over the coming 12 months, versus 1.17 at present.
But euro enthusiasts may have to wait for a significant rise for the following reasons:
- The euro has already moved swiftly to price in the improved outlook for the region's economy. It has been the best performing G10 currency this year, rising 12.3% relative to the US dollar.
- The European Central Bank (ECB) has signaled its intention to keep monetary conditions easy. At its October meeting, President Mario Draghi left room for the ECB to continue buying bonds beyond September 2018 if monetary conditions (i.e. exchange rate, equity markets, credit costs) start to hurt the growth and inflation outlook. This should check the EURUSD rise for now.
- There is some pressure for a stronger dollar in the near term. US growth also beat forecasts for the third quarter and hopes are rising that Congress will pass tax reform, including a net tax cut.
So, we believe the euro will be range-bound versus the US dollar, trading between 1.15 and 1.20 in the coming few months.
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