Euro continues its strong comeback after the move lower at the start of the trading year. Despite all the negatives from Europe, and there are a few, the Euro remains resilient and finds buyers on every dip.
The European Commission has recently downgraded the economic forecast for the year ahead. It revised the economic growth to the downside, citing worse than expected winter and longer lockdowns due to the pandemic. We might add here the total fiasco of the vaccination campaign in Europe as well as the insufficient fiscal stimulus in comparison with other parts of the world (e.g., the United States). Furthermore, Europe is weaker due to the United Kingdom leaving the union at the end of the last year.
Euro Supported by the Positive Turn in Italian Politics
One thing happened in Europe lately that might explain the rise of the Euro. That is, Italy has a new prime minister. Only it is not any prime minister, but Mario Draghi, the former ECB President, credited for saving the Euro a few years ago when saying that the ECB will do “whatever it takes” to support the common currency.
Markets loved the development in Italian politics. Since the news became official, the Italian spread has lowered as the faith in Draghi remains at elevated levels in European circles.
From that moment on, the Euro bounced from its lows. The EURUSD pair turned from below 1.20 only to trade close to 1.22 yesterday. Moreover, the EURJPY trades well above 128 while the EURAUD and EURCAD remain supported on dips, too, affected by stronger commodity prices rather than what happens with the Euro.
Some argue that Draghi came back now to save Europe after he saved the Euro. However, few remember that Draghi was the first ECB President to never hike rates in his eight years at the height of the institutions. Moreover, his extreme dovishness was the one responsible for the Euro easing from 1.40 to almost parity against the dollar. The move lower helped European exports and contributed to economic growth, but nevertheless, it was a lower Euro instrumented by Draghi’s policies.
Now that he’s back in a major role in European politics, one should not be surprised to see Italy more actively involved in the faith of the old continent. If anything, his return should be just another bearish factor to add to the Euro’s list mentioned at the start of this article.