Macquarie analysts have shifted their outlook on the EUR/USD, stating that the “bottom is in” for the euro.
In a note Tuesday, the analysts attributed its shift to Europe’s newfound assertiveness, particularly its commitment to increasing defense spending, which could significantly boost economic activity.
The move towards re-arming, or “re-assertiveness,” is expected to be a key driver for the EUR’s strengthening, as it involves a debt-financed fiscal expansion that would lead to reflation and a potential reconsideration of ECB policy rate cuts.
European Commission President Ursula von der Leyen’s announcement of a €650 billion defense fund, alongside additional EU lending of €150 billion for member states, is said to mark a major step towards meeting defense spending goals.
The initiative would see defense spending increase by around 0.75% of EU GDP per year, a move likely to improve Europe’s economic outlook and strengthen the euro.
Macquarie also highlights that Europe’s move towards re-arming is likely to be linked to a tariff agreement with the US.
The analysts suggest that a “deal” between Europe and the US, where Europe directs some of its new defense spending towards the US, could help address the US trade imbalance and further bolster the euro.
Furthermore, the analysts note that while global stock indexes may be retreating, the EUR, along with other currencies like GBP, CAD, and JPY, are strengthening due to Europe’s reassertion.
As the EU works towards fiscal expansion and increased defense spending, Macquarie is confident that the EUR/USD has reached its bottom, with more positive developments expected in the coming months.
