The euro has been on a tear lately, being at a six-month high against the greenback in early May. In the last three months (as of May 22, 2017), CurrencyShares Euro ETF (FXE - Free Report) was up about 6.4% while the greenback ETF PowerShares DB US Dollar Bullish ETF (UUP - Free Report) lost about 4.4%.
Inside the Euro Rally
Several reasons are behind this rally. Below we highlight a few and find if the rally has legs.
Improving Euro zone Economy
The Euro zone saw a strong start to the year thanks to economic improvement and upbeat corporate earnings. The Eurozone economy grew 0.5% sequentially in Q1 of 2017, meeting market expectations. The region also expanded faster than the U.S. in 2016 for the first time since 2008.
Ebbing Political Risks
Euro zone’s second-largest economy – France – chose Centrist and business-friendly candidate Emmanuel Macron as its president in a run-off election in early May. With this, France followed the footsteps of the Dutch and discarded populism. All these have lowered the growing upheaval in European politics to a large extent (read: French Election Soothes Sentiments: ETFs Likely to Benefit).
Compelling Valuation
In early December 2016, the common currency Euro plummeted to a 20-month low following the results of Italy’s constitutional referendum which indicated political uncertainty. This kept euro’s value at check and gave the currency room to run (read: What Does Italy Referendum Mean for These ETFs?)
Looming ECB Policy Tightening?
Though the ECB is practicing a QE policy along with rock-bottom interest rates, a steady improvement in the region may lead the central bank to tighten policy in the near term. Already German Deputy Finance Ministercommented that “the European Central Bank should begin unwinding its ultra-loose monetary policy soon if it wants to avoid damaging side-effects.â€
