Euro eyeing out 1.18 against the dollar

27 Jul 2020

The Euro has been on a tear recently, up 8.55% against the US Dollar over the past three months as investors become increasingly more confident in the continent.

The European Union recently has had many tailwinds as of late: Containment of Covid-19, general alignment in how to combat the Coronavirus, and their 75 Billion euro recovery package lead investors to believe that Europe is where outperformance is.

Given the recent expansion in the valuation of US equities, specifically tech stocks in the NASDAQ, the premium for owning non-cyclical internet businesses have been quite expensive. The NASDAQ trades at a 29.88 multiple, making value stocks such as banks in Europe look dirt cheap. For example, UBS and Deutsche Bank have a price/earnings ratio at 9.69, and Deutsche Bank has a negative P/E ratio with both trading at price/book value of less than 1. Therefore, the Euro may be getting a boost from US investors pulling their money out of the local market and investing in companies in Europe.

There has been an increase in technical factors pushing the Euro higher. Recently, we have seen the EUR/USD push above its 200-day moving average during its recent push past 1.17. The last time the Euro pushed past the 200-day moving average was in 2018. We may see Euro gap 1.18 on worsening US macro conditions and a more pessimistic view from the Fed than was expected this coming week.

However, the Euro’s strength may be partially due to the weakening in the US Dollar. The Dollar index is down 6.58% in the past three months. With the US still pumping cases across the states with no official Coronavirus plan, investors have lost interest in the US Dollar safe-haven trade as value pops up across Europe. With that said, the US reported 65,809 daily cases, a 1.6% decrease from the previous weeks’ 7-day moving average. This is a positive sign for US strength; however, this is still miles away from flattening the curve, as many other countries have done.