The European Central Bank is not expected to alter strategy at its meeting on Thursday, but traders are keen to see if evidence emerges at its press conference suggesting policy is more likely to be tightened given the bloc’s economic improvement.
A more hawkish slant could give a further leg-up to the euro, which has been strengthening of late versus the dollar and pound as investors become relatively less optimistic about the US and UK economies.
All of which begs the question: will a strengthening common currency put eurozone equities under pressure?
Capital Economics, the research boutique, thinks not. It sees the euro up to $1.15 by the end of 2018 and $1.20 by the end of 2019 as the end of Fed tightening heaves into view and traders price in rate rises by the ECB.
“In principle, a stronger currency can weigh on equities by reducing the local-currency value of overseas earnings of multinationals, and by worsening the outlook for exports,” says CapEco’s Daniel Christen.
However, even though the euro has risen 7 per cent against the dollar this year, the Euro Stoxx 600 index has gained 8 per cent. It is not unusual.
Stocks and the euro moved in tandem in the early 2000s and in the aftermath of the financial crisis.
Now, improving economic conditions in the bloc are lifting the euro and encouraging global equity investors to raise their exposure to the continent.
CapEco sees Germany’s Dax index at about 13,500 by the end of 2017.