EUR/USD: Three ways for the euro to recover against the greenback.

In the recent period, the euro has depreciated quite sharply against the US dollar despite the euro zone’s significant external surplus and the United States’ significant external deficit. For the euro to pick up, it would take expectations of catch-up in the European equity market, a reduction in the yield spread between the dollar and the euro and the prospect of stronger growth in the eurozone, as reported by Natixis.

A contest between the euro zone’s external surplus and capital outflows.“We see that the eurozone is affected by significant direct and portfolio capital outflows, which explains the weakness of the euro despite the zone’s external surplus.”“What is responsible for these capital outflows? The faster rise in US equity markets, due in particular to the weight of technology companies in the US, the long-term yield spread between the US and the eurozone and the greater appeal of the US for direct investment in the recent period.”

“For the euro to recover against the dollar, it would therefore take expectations among investors of catch-up in European equity valuations relative to US equities, an announcement of monetary policy tightening by the ECB and/or expectations of improved growth in the eurozone to attract direct investments.” 

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