EURUSD daily
This week Deutsche Bank shifted its view on the euro in a shift to neutral. It’s been a nice ride down to 1.0480 from 1.09 at this time last year but they are seeing changes in the political winds on both sides of the trade.
- The three German centrist parties are likely to opt into a very large new defence fund that bypasses the German debt break
- They view that as a sign German fiscal capacity will be used
- They also see this as a pathway to stability and peace in Ukraine
- A more conservative fiscal policy from the US administration that’s led to a decline in Treasury yields
“We see the balance of risks as evenly distributed over the next few months, with downside risks emanating from additional disruption from trade policy/tariffs (and by extension a more dovish ECB stance), but upside risks emanating from a more pro-active German fiscal stance and a more positive resolution to the Russia – Ukraine crisis”
Notably, they said this view could shift in the coming weeks depending on what happens with defense spending. Since the note, Merz did say it would take some time to alter the fiscal brake and he called it ‘complex’.
As for a broader weakening of the US dollar, they don’t have that view yet but are watching for signs of more Fed easing.