H2 Currencies to Watch: Advantages and Obstacles for the Euro

Euro-notes

This is the third article in our blog series on what businesses need to know about key global currencies in the second half of 2018. Sign up for our weekly FX newsletter to get these articles sent straight to your inbox.

In this article, we'll cover economic and political events that both benefit and present obstacles for the Euro, as well as what businesses can expect of the European currency in the 2nd half of 2018.


In what has now become the norm over the last decade, the euro faces a number of pressing challenges as it heads into the latter half of 2018. It does so, however, on the back of some strong economic performance indicators and developments from within the eurozone.
 

Euro Positives and Advantages

Growth

The European Union (E.U.) has grown at its fastest pace since 2007, with a 2.5% increase in 2017. This growth has been predominantly driven by its four main economies: France, Germany, Spain, and Italy. The European Central Bank (ECB) predicts "solid" real GDP growth for the eurozone up to 2020.

Greece progress

Other Articles in this Series

More good news for the eurozone as Greece declared that its eight-year debt crisis was over in June 2018, after a bailout exit deal with its fellow eurozone member countries. The economic trouble that engulfed the Mediterranean country after the global financial crisis put the single currency under an extraordinary amount of pressure, with its very survival at stake.

Not only will Greece's stabilization and exit from its bailout program inspire investor confidence in the euro, but it also demonstrates how resilient the eurozone is after weathering a seemingly endless stream of financial and economic storms throughout its sovereign debt crisis. Greece's progress comes on the back of strong economic recoveries in Ireland, Portugal, and Cyprus, three other eurozone member countries that required multi-billion euro bailouts.

Franco-German alliance

On pause for years, the Franco-German alliance that powered European integration is up and running again. The two countries agreed to a provisional plan to reform the eurozone and introduce a new budget. Although the details still have to be worked out, this agreement marks a shift in gears that bodes well for the eurozone's future.


Euro Obstacles and Challenges

Political uncertainty

        While the eurozone is economically
        more stable than it has been in years,
        politically and socially it is
        increasingly divided. 

While the eurozone is economically more stable than it has been in recent years, politically and socially it is increasingly divided. Italy's recent general election resulted in a coalition government between the far-right League party and anti-establishment 5-Star Movement. However, the new Italian government has no intention of leaving the eurozone. Meanwhile, Spain has been led by a new minority government since June 2018, with predictions that it will not last long in power without a stronger mandate. For now - and going into the latter half of 2018 - both countries' political situations look to be resolved.

International trade wars

What is more pressing right now for the euro is the brewing trade war that the United States has begun with China and with the E.U. Struggling to stay above the 1.15 mark, the EUR/USD pair is set to weaken as China and the U.S. continue their trade war. The E.U. has also retaliated to U.S. tariffs on goods by levying duties on €2.8 billion of U.S. goods. However, with the Federal Reserve raising interest rates again and the ECB announcing that eurozone rates will remain the same until at least summer 2019, the euro is likely to weaken, helping European exporters and punishing American exporters to the E.U. American importers however will likely pay less for European goods.

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Economic stimulus

The ECB has announced that it will end its monetary stimulus program. A strengthening economic situation and outlook for the eurozone has persuaded the ECB that now is the right time, but it does present a sizable risk to continued growth and economic stability. For the countries who have consistently sold bonds to the ECB, they will have to essentially learn how to cycle with the ECB stabilizers off again for the first time since the start of 2015, which could result in "serious consequences". However, an end to the ECB stimulus program should increase investor confidence in the eurozone.

Brexit

Lack of progress on Brexit negotiations between the U.K. and the E.U. continues to create uncertainty as the clock ticks down to the March 29, 2019 date. Although, the E.U. has said that a no-deal Brexit is "unlikely" given the massive damage it could do to the eurozone economy, with predictions that it would cost the bloc over €100 billion. With the Irish border issue continuing to hold up talks, it remains to be seen how both parties will reconcile their differences. Whatever the outcome, it is sure to have a knock-on effect on the euro, for better or worse.


What Businesses Need to Know

The ongoing U.S.-China and U.S.-E.U. trade wars will probably have the opposite effect of President Trump's purported intentions to strengthen the U.S. economy. The truth is that the European Central Bank is happiest with an exchange rate that is lower than $1.20, as it helps boost European exports. With U.S. interest rates continuing to rise, companies will likely pay less dollars for goods and services denominated in euro.

Now, though, with the E.U.'s retaliatory tariffs on a range of U.S. goods, E.U. customers will have to pay an extra 25% tax on purchases. Goods subjected to these tariffs include orange juice, peanut butter, bourbon whiskey, tobacco-based products, beauty and makeup items, jeans, steel, motorcycles, and more. If U.S.-based companies export these products to the E.U., they may see a slowdown in sales.

Both the U.S. and the European economies have demonstrated that they are more robust and stable. However, given the unpredictable nature of the U.S. executive branch and continued political and social instability in Europe, companies may wish to pursue a hedging strategy if operating with the EUR/USD pair.


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