The euro may take pundits by surprise next year by climbing faster than expected.
The common currency is seen rising to $1.12 by March before a steady ascent to $1.16 by the end of 2020, up from around $1.1065 now, according to a Bloomberg survey. Yet some analysts could be underestimating the prospects for fiscal stimulus, a growing chorus against the European Central Bank’s sub-zero interest rates and the potential for a pick-up in volatility that would threaten the viability of using the euro as a funding currency for carry trades.
An increasing number of banks are becoming more optimistic on the euro’s 2020 prospects. Morgan Stanley is the most bullish on Wall Street, betting on the euro rallying nearly 5% to $1.16 in the first quarter as one of its top trades. ABN Amro Bank NV and Commerzbank AG also see a faster climb to $1.14 by March, as the region’s economy stabilises and Brexit uncertainty fades. And options traders are betting on gains for the common currency.
The new ECB President Christine Lagarde, who will give her first policy meeting announcement on Thursday, seems focused on the need for greater fiscal stimulus to tackle the region’s growth and inflation troubles. She has acknowledged that “the ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place,” which in theory supports bets on further interest-rate cuts next year, as current market pricing suggests.
This sub-zero monetary stance is being increasingly challenged by euro-zone finance chiefs, complaining about its detrimental impact on savings and pension systems. And they are not alone. Pacific Investment Management Co warns that negative rates may be doing more harm than good as they squeeze banks’ profitability, depress market returns and create a “money illusion” in which savers feel poorer and thus cut consumption.
Policy makers counter that negative rates wouldn’t last so long if governments did more to stimulate their economies. The ECB may end up tweaking its inflation goal to 2% over the medium term, which could finally result in a pick-up in inflation expectations. Then the market may need to start pricing in a move away from negative interest rates, effectively reducing the euro’s allure as a funding currency.
This year, the potential for a euro rally — as predicted by strategists at the start of 2019 — has been suppressed by the use of euro as a funding