Stronger euro tempers Europe’s rally

Continental stocks have slipped since they reached a two-year high in May, but this may just be a pause for breath.

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The exports should keep moving
(Image credit: Art Wager)

Continental stocks have slipped since they reached a two-year high in May, but this may just be a pause for breath. Investors impressed by the eurozone's economic recovery GDP grew by 2.3% year-on-year in the second quarter have started to fret that a strengthening euro will dent growth and company profits. The eurozone is more reliant on exports than other major economies: they account for 44% of the bloc's GDP, compared with around 28% in Britain and 13% in America.

Nonetheless, the fuss looks overdone. As we noted last month, the euro, having fallen for years, is nowhere near its historic highs. And a weak euro did little to bolster company profits and growth during the crisis and its immediate aftermath, suggesting that it is hardly the pivotal factor underpinning growth. Indeed, many analysts point out that improving domestic and global demand should negate the drag from a stronger euro. Both euro area and global growth are at multi-year highs. Barclays, for instance, has left its earnings growth forecast for Europe excluding the UK at 10%, despite the euro's recent upswing. It also notes that there is plenty of money still on the sidelines that could find its way into European stocks as confidence spreads.

We may hear a lot less about the strong euro in any case over the next few months. The German election result is a reminder that political uncertainty has hardly disappeared from the eurozone, while the European Central Bank is loath to wind down its money-printing programme too quickly. That militates against monetary tightening which implies a stronger euro occurring anytime soon. The euro rally could be largely over: there seems limited scope for it to shoot to the moon.

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Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.