50

The euro has seen a remarkable rebound in March, regaining ground it lost since the election of Donald Trump in November 2024. Strong fiscal reforms in Germany and concerns surrounding the US economy have fueled the rally, pushing the euro to 1.0850 against the dollar. This surge represents a 4.4% increase in just one week, marking the strongest weekly gain since March 2009.

While some analysts predict further upside for the single currency, others caution that Germany’s fiscal execution risks and looming US tariffs may limit the euro’s potential.

Germany’s Fiscal Overhaul Sparks Optimism

Germany’s ambitious fiscal reforms have become a key driver behind the euro’s impressive performance. The CDU/CSU-led coalition in Germany has laid out plans to reform the country’s debt brake and launch a €500 billion infrastructure fund. These measures aim to stimulate economic growth, increase defense spending, and tackle challenges posed by the aging population.

However, passing these reforms requires a two-thirds majority in Germany’s parliament. Chancellor-in-waiting Friedrich Merz will need to gain support from the Green Party to push through these plans. Analysts, including those from Danske Bank, anticipate that approval for these reforms could come as early as next week.

The announcement of large-scale investments, coupled with strong economic data, has buoyed investor sentiment. Germany’s industrial output surged by 2% in January, surpassing the expected 1.5% increase. With these promising signs, Europe’s largest economy appears to be on a path toward recovery.

US Economic Slowdown Shifts Investor Focus

The economic situation in the US is also contributing to the euro’s recent rise. Weak economic growth forecasts and trade tensions have prompted investors to reconsider their strategies, shifting focus away from the dollar.

Federal Reserve Chair Jerome Powell recently acknowledged growing economic uncertainty as data indicated a cooling labor market. The Atlanta Fed’s GDPNow model suggests that US economic growth in the first quarter may contract by 2.4%, further adding to concerns about the strength of the dollar.

The European Central Bank (ECB) remains cautious about making further rate cuts. While it delivered a widely anticipated 25-basis-point cut last week, it signaled that inflation in the eurozone could remain above 2% for an extended period. In response, Danske Bank now believes that an additional rate cut in April is unlikely, citing a strengthening eurozone recovery and persistent inflation risks.

“Further ECB rate cuts seem increasingly uncertain,” said Boris Kovacevic, global macro strategist at Convera.

Experts Remain Divided on the Euro’s Future

While the euro’s recent surge has sparked optimism, analysts remain divided on the currency’s future trajectory.

Bank of America remains bullish on the euro, forecasting that it could reach 1.20 against the dollar. Analysts point to structural factors and shifts in market sentiment as key drivers behind their optimistic outlook.

“Despite some market adjustments, investors are still short EUR/USD,” said Athanasios Vamvakidis, forex strategist at Bank of America. The bank’s forecasts suggest that Germany’s fiscal expansion and broader reforms within the eurozone could push EUR/USD to 1.15 by late 2025 and 1.20 by the end of 2026.

On the other hand, Goldman Sachs has raised concerns about the euro’s future, warning that execution risks related to Germany’s fiscal reforms and the resilience of the US economy could dampen the euro’s gains. Kamakshya Trivedi, global FX strategy head at Goldman Sachs, highlighted that passing Germany’s fiscal reforms within a short time remains a significant challenge.

Goldman Sachs also believes the recent strength in the euro is largely due to broader dollar weakness. The bank predicts that EUR/USD could drop to 1.02 in the next three months and fall below parity (0.99) within a year if US tariffs exacerbate economic gaps between the US and the eurozone.

The Euro’s Outlook Amid Ongoing Uncertainty

The euro’s recent rally has been driven by a combination of Germany’s fiscal reforms and investor concerns about the US economy. However, analysts remain cautious, recognizing the risks associated with both the execution of Germany’s plans and the potential impact of US tariffs. While some predict further gains for the euro, others believe that the recent surge could be short-lived if economic conditions shift.

As always, the situation remains fluid, and investors should closely monitor developments in both the eurozone and the US to navigate the uncertainties ahead.

For more updates on the euro’s performance and related market news, visit Financial Mirror.