Europe on the fast lane
The euro will profit from the more dynamic growth backdrop in the Euro zone as it feeds speculation that the ECB will scale back some of its extraordinary stimulus. Only the interest rate advantage of the US dollar caps this development, writes David Kohl, Chief Currency Strategist, Julius Baer
Euro zone gross domestic product (GDP) grew in Q1 2017 0.5 per cent quarter-on-quarter, more than double the pace than in the US, which expanded by just 0.2 per cent when applying a comparable calculation instead of the annualised growth figure of 0.7 per cent. Manufacturing activity measured by the lasted purchasing managers’ index (PMI) reading accelerated once again in the Euro zone while showing less growth in the US, and the same holds true for consumer sentiment readings. Forward-looking indicators such as credit dynamics are also stronger in the Euro zone than in the US.
We expect this strength to be a support for the euro going forward as it feeds the speculation that the European Central Bank (ECB) will scale back some of its extraordinary stimulus. We adjust our three-month forecast to 1.11 EUR/USD. The interest rate advantage of the US dollar is the biggest hurdle for a stronger euro and given the Fed’s apparent readiness to hike rates in June, this cap remains in place for the coming months.