The euro: all signals on green

Everything indicates the euro will continue rising. The ECB is finally seeing the economy recovering considerably as well, while the dollar is under pressure due to the increasing budget deficit and a Chinese policy change, according to Laurens Maartens from the Dutch Payment and Exchange Company.

The European economy is doing well. Everyone who walked through shopping streets or looked at a news website in recent months knows that. Policymakers of the ECB are also gradually figuring out that the economy is flourishing. On Thursday, the notes of the meeting that took place mid-December were published. These show that all members supported the decision to leave interest unchanged and to continue the encouragement programme. This was hardly a surprise.

The comment that the ECB, due to the strong economy at the start of the year, wants to prepare the market for ending the buying up programme is surprising. As a result, traders suddenly look very differently to the next ECB meeting on 25 January. The chance that the central bank will give a clear signal that it will stop buying up (state) bonds and other assets in coming autumn has suddenly become much larger.

The political front also had good news for the euro. On Friday morning it was announced that the CDU from German Chancellor Angela Merkel and the SDP had reached an agreement in principle about forming a coalition. Although the Italian elections could cause uncertainty, the political tension has decreased again somewhat due to the prospect of a stable government in Germany. On money markets, traders now have a 70 percent chance of a small interest rate hike before the end of 2018. At the start of last week, this was still only 50 per cent. Because of this, the euro will be given a considerable boost.

The boost to the euro comes at a time when the dollar is under much pressure. For once, this has nothing to do with the policy of the Federal Reserve, and everything with news from China. Reports have come to light that the country is considering buying fewer or even no American government bonds. An important reason would be that Chinese policymakers have more appealing investment alternatives. Besides, due to worsening trading relations, the country wants to give off a signal towards the US.

The prospect that an important buyer could possibly withdraw themselves from the market, led to the return of government bonds increasing sharply. A ten-year loan now has a return of 2.6 per cent. That is the highest level since mid-March. China won’t turn away with too much conviction from the American government loans, for that matter. The most recent figures show that the country has similar bonds worth $1,200 billion.

The euro rose sharply to more than $1.20 due to the news from Europe and China. The currency is now fluctuating around its highest level since winter 2014. The dollar has been under pressure for some time now. Besides the recovering economy in Europe, internal matters also play their part in this. The American tax cut might give the economy a boost in the short term, but due to lower incomes the budget deficit is in danger of reaching $1,000 billion in the US. The difference that an enormous amount has to be borrowed, results in parties becoming more reluctant to invest their assets in dollars.

Many parties are predicting the euro will gain more ground. Currency experts of the Deutsche Bank predicted earlier this week that the euro could continue rising to $1.30. It’s now tempting to get carried away by the flow of news and by the strength of the euro-rise. Nevertheless, it’s wise not to lose sight of the fact that the strength of the euro has a partially shaky basis. Sentiments could change suddenly. For instance, when the ECB hints that lower inflation is more important than healthy economic growth on 25 January, or when new Fed chairman Jerome Powell decides on a more aggressive direction.