The euro surged to 1.0850 against the US dollar, wiping out all losses since the 2024 election of former President Donald Trump, marking a 4.4% weekly rally. This significant rise came amid a shift in Germany’s fiscal policy and concerns over the future of the US economy. As the euro saw its strongest weekly gain since March 2009, analysts are split on the currency’s future trajectory, with some predicting further gains, while others point to potential risks tied to Germany’s new policies and possible US tariffs.
Germany’s Fiscal Reforms Fuel Optimism in Eurozone
Germany has recently announced sweeping fiscal reforms aimed at stimulating its economy. The country’s CDU/CSU-led coalition revealed plans to ease its debt brake and launch a €500 billion infrastructure fund. This ambitious initiative is designed to boost growth, improve infrastructure, and increase defense spending. However, the reforms require approval from two-thirds of Germany’s parliament for constitutional changes.
Chancellor-in-waiting Friedrich Merz is expected to work closely with the Green Party to secure the necessary support for the legislation, which could be passed next week. The measures, if implemented, are expected to significantly strengthen the German economy and provide a much-needed boost to the wider eurozone.
According to Danske Bank, the fiscal reform, combined with the €500 billion infrastructure fund, would inject substantial public investment into the economy, helping to stabilize and revitalize the country’s economic outlook. Recent data showing a 2% rise in German industrial production in January, surpassing the forecasted 1.5% increase, further reinforces the optimism surrounding the country’s fiscal future.
US Economic Concerns Weigh on Dollar’s Strength
While Germany’s fiscal changes have supported the euro, concerns over the US economy have led investors to reassess the strength of the dollar. Recent signals from the US Federal Reserve, particularly from Chairman Jerome Powell, have pointed to growing economic uncertainty. Powell acknowledged that economic conditions are cooling, with weak labor market data and lower growth projections causing market apprehension.
The Atlanta Federal Reserve’s GDPNow model forecasts a possible 2.4% contraction in US first-quarter growth, raising further concerns about the future of the dollar. These factors have prompted investors to look more favorably on the euro, which has benefited from the perceived weakening of the US economy.
European Central Bank (ECB) Takes Cautious Stance on Rate Cuts
Despite the euro’s rally, the European Central Bank (ECB) remains cautious about future rate cuts. The ECB recently delivered a widely expected 25 basis-point rate cut but has refrained from committing to further reductions. ECB Executive Board member Isabel Schnabel warned that inflation in the eurozone could remain above the 2% target for a longer period, making additional rate cuts uncertain.
Danske Bank analysts have raised questions about the ECB’s next steps, suggesting that aggressive rate cuts may be unlikely due to persistent inflation risks and the overall resilience of the eurozone economy. Boris Kovacevic, global macro strategist at Convera, stated, “With inflation risks persisting, aggressive ECB easing seems unlikely.”
Bank of America Predicts Continued Euro Strength
Despite some caution, analysts at Bank of America remain bullish on the euro, predicting it will continue to rise. They see significant structural shifts in the eurozone that will push the euro higher. According to Athanasios Vamvakidis, forex strategist at Bank of America, the market remains short on EUR/USD, despite recent adjustments in positioning. The bank predicts that Germany’s fiscal stimulus and broader eurozone reforms will propel EUR/USD towards 1.15 by the end of 2025 and 1.20 by 2026.
Goldman Sachs Warns of Potential Euro Weakness
On the other hand, Goldman Sachs remains skeptical about the euro’s long-term strength. The investment bank expressed concerns over the potential execution risks related to Germany’s fiscal reforms, and doubts whether these reforms can be quickly implemented. Kamakshya Trivedi, head of global FX strategy at Goldman Sachs, suggested that much of the euro’s recent rally is due to the weakening of the dollar rather than strength in the euro itself.
Goldman Sachs also anticipates that the US economy will continue to outperform, especially if tariffs exacerbate economic divergence between the US and the eurozone. The bank has forecast EUR/USD to fall to 1.02 within three months and predicts the euro could drop below parity with the dollar (0.99) within the next year.
Euro’s Future Remains Uncertain Amid Mixed Forecasts
While the euro has gained momentum due to Germany’s fiscal reforms and the weakening US dollar, its future remains uncertain. Analysts are divided, with some predicting the euro will continue to strengthen as European reforms take hold, while others warn of potential risks related to the execution of these reforms and the resilience of the US economy.
As the global economic landscape continues to evolve, market participants will closely monitor developments in both the eurozone and the US. For more insights on the euro’s movement and economic developments, visit Wallstreet Storys.
