The euro surged above $1.085 on Friday, reaching its highest level since November 5th and heading for a 4.6% weekly gain, marking its strongest performance since March 2009.
Euro set for best week in 16 years
The rally was driven by several key factors, including Germany’s fiscal reforms, a more cautious approach from the European Central Bank (ECB) regarding future rate cuts, and a weaker dollar amidst growing concerns over US President Trump’s threatened trade wars. Germany's major political parties unveiled plans to reform the country’s debt brake, which would allow for increased defense spending and a €500 billion infrastructure initiative aimed at spurring economic growth. These ambitious plans signaled a commitment to economic stimulation and strengthened investor confidence in the eurozone's future prospects. Additionally, European leaders reached an agreement on Thursday to significantly boost defense spending, reinforcing Europe’s defense industry and enhancing its military capabilities in response to shifting global dynamics.
ECB effect on the euro
On the policy front, the ECB delivered a widely anticipated 25bps rate cut and indicated that monetary policy is becoming less restrictive, hinting at a potential pause in further reductions. This more cautious stance on interest rate cuts from the ECB has helped to stabilize expectations around the euro and provided some support for the currency. Traders are now anticipating one or two additional 25bps cuts later this year, but the overall tone from the ECB suggests that any future reductions will likely be more measured and gradual.
Further impacting factors
The combination of Germany's fiscal stimulus plans, the ECB’s cautious policy approach, and broader geopolitical uncertainties surrounding trade tensions has contributed to the euro's strong performance this week. With the dollar under pressure, the euro continues to capitalize on these supportive developments, reinforcing its position in the global currency markets.
