Will Euro/US dollar continue uptrend?

This view has not necessarily been predicated on the idea that the US economy will suddenly go from ‘great’ to ‘bad’, or that the euro zone will travel in the opposite direction. It’s more down to the fact that US exceptionalism has seemingly created overvaluation and concentration risk.

In other words, even if the US stays ‘great’ and the euro zone ‘bad’ the US dollar will likely ease down simply because this outperformance has been so well encapsulated in asset prices, notably stocks, and in euro/dollar, that the upside for the greenback seems limited. Indeed, this might have been the way of things already because the US has been exceptional and the euro zone bad in recent years but the euro has not really fallen. It has stuck mostly around a range of 1.05 to 1.10 since late 2022. This suggests that traders and investors might already be somewhat satiated in US stocks and the US dollar.

If this is an accurate state of affairs it would seem that the euro actually has significant upside if the euro zone economy can display even the merest hint of becoming better, let alone exceptional. For such a switch in perceptions about the euro zone could unleash pent-up demand for euro zone assets, and perhaps especially if the US economy is heading in the opposite direction. The irony, of course, is that it is the incoming Trump administration that seems to be weighing on the US’s ability to be exceptional, especially when it comes to tariffs and, at the same time, offering the euro zone an opportunity, or perhaps a compulsion, to become stronger.

Now clearly that’s not just down to tariffs for, as we know, tariffs make everyone worse off and particularly if countries retaliate, as the euro zone has done so far. Instead, the US’s input in making Europe stronger comes through the fiscal wake-up call for the region, particularly Germany, and particularly in terms of defence spending. The German economy contracted in both 2023 and 2024 and expectations for this year have been pretty low as well, albeit not negative.

With this sort of profile priced into, not just German, but also euro zone assets, like stocks and the euro, it seems clear that even a modest uplift to growth hopes, created by new-found fiscal largesse, can lead to a significant reassessment of both the equity market and the euro. This seems to be exactly what is going on at the moment.

For instance, if we look at inflows into US and euro zone equity ETF’s, we see a notable improvement in European-focused funds, not just relative to historical inflows but also relative to the US, where inflows have collapsed. But is it a bit too easy to say that the euro zone will improve from here while the US slips back, generating both significant and continued euro zone stock market outperformance along with a much stronger euro/dollar? Of course it is. These are the early days of the Trump administration and it is still likely that the early concerns over a recession prove far too premature. At the same time, expected recovery in the euro zone could be another false dawn. The region has been poor at taking advantage when opportunities arise, bogged down by endless red-tape, the need for compromise to get all members on board, and much more.

It could, of course be different this time, spurred by the acute need for more defence spending. Only time will tell. But while we could rush in here and declare the sort of sea-change in the US/euro zone growth divide that lifts our euro forecasts substantially, we are playing it more cautiously. In the Standard Bank’s view, the target range is still 1.20-1.30 for euro/dollar and it will still take some considerable time to get there.