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The Euro Continues To Pick Up

The euro is currently recovering and with strength.

By EC Invest

Having achieved parity with the US dollar in 2022 - and even beyond, as our dollar was only worth 96 cents at its weakest point - the Euro continues its recovery. By the end of the week, it was over $1.08, a level it had not experienced since April 2022.

The prospect of American key interest rates that would end faster than expected is a significant factor. This is logical since the European Central Bank recognises there is still a long way to go on this front. Therefore, the rate differential between the two sides of the Atlantic should narrow, supporting our currency.

The latest indicators from the euro area are reassuring. At 6.5% in November, the unemployment rate is at its lowest. Moreover, as many households have a salary, they lend a helping hand to the economy, even if purchasing power is sharply declining due to a surge in inflation.

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In addition, the beginning of a mild winter suggests that the dreaded energy supply problems will eventually not occur. And since governments support households and businesses, the private sector does not end up doing so poorly. As a result, confidence is returning, and the recession that everyone is expecting this Winter should finally be shallow.

Would the worst be over, and would the euro be ready to rebound permanently? Still trying to figure it out.

The States will not have the financial means to extend the aid introduced in recent months. Moreover, given their level of debt and the continuing rise in interest rates, tensions in the bond market are likely. And since inflation remains higher in Europe than in the United States, the ECB does not have the necessary leeway to lower key interest rates soon.

In addition, the recovery of hydrocarbon stocks is expected to be difficult, and everyone is expecting a next Winter that is much more delicate in terms of supply than we are experiencing. Therefore, a new surge in gas and electricity prices towards the end of 2023 is not to be ruled out.

Finally, this gas will be bought at a high price, weighing on the European trade balance, which was negative in December, as every month since early 2022. Once a beneficiary, the latter aligns the deficits, which removes fundamental support for the euro’s strength on foreign exchange markets.

The revival of the euro’s colours is not necessarily sustainable, even if it could continue in the short term. Nor is it likely to change our position on euro area financial assets.

We stay away from eurozone equities and maintain a reduced exposure to government bonds, except the defensive portfolio.

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