Original Article Credit: Geoffrey Smith, Investing.com
Article Source: [Investing.com – This Strategist Thinks EUR/USD is Going to 1.40](https://www.investing.com/news/forex-news/this-strategist-thinks-eurusd-is-going-to-140-heres-why-4133936)
Title: Long-Term Outlook for EUR/USD: Strategist Foresees a Bullish Surge to 1.40
In a bold forecast that challenges the prevailing sentiment in the currency markets, one prominent strategist has outlined the case for a significant rise in the EUR/USD exchange rate. According to Erik F. Nielsen, UniCredit’s Group Chief Economics Advisor, there are compelling structural and cyclical reasons for the euro to appreciate notably against the U.S. dollar in the coming years. Nielsen projects that the euro-dollar pairing could rally to as high as 1.40, which would represent a dramatic gain from its currently modest level.
The euro has recently found some upward momentum, largely reflecting expectations of an economic recovery in the eurozone and a dovish signal from the U.S. Federal Reserve. Yet Nielsen sees the rally as more than a short-term reaction to market sentiment or monetary policy differentials. His view is rooted in long-term macroeconomic trends and structural shifts in global investment behavior. Below, we explore the core elements of Nielsen’s argument for why EUR/USD could reach 1.40 in the medium to long-term horizon.
Overview of the Current Market Backdrop
At present, the EUR/USD exchange rate hovers around the 1.08–1.09 level. This range reflects the complex tug-of-war between U.S. economic resilience and a sluggish eurozone recovery. Recent data has shown the eurozone economy beginning to rebound after its post-pandemic stagnation, while the U.S. economy remains relatively strong due to robust consumer spending and a tighter labor market.
Nonetheless, several macroeconomic themes are beginning to shift:
– The European Central Bank (ECB) is starting to pivot toward a more neutral stance after years of monetary easing.
– The Federal Reserve is widely expected to begin cutting rates in 2024.
– Inflation in the eurozone appears to be stabilizing, giving policymakers some room to maneuver.
– Energy prices, which heavily impacted Europe in 2022 and 2023, are normalizing.
Amid these changes, Nielsen believes the euro is poised to strengthen considerably over the next two to three years.
Structural Factors Supporting Euro Appreciation
Nielsen’s bullish outlook for the EUR/USD is primarily rooted in a range of long-term structural factors, which he argues are currently underappreciated by the broader market and by many analysts.
1. Eurozone’s External Position
– The euro area has consistently maintained a large current account surplus, reflecting strong exports and relatively weak domestic demand.
– In contrast, the U.S. continues to run significant current account deficits.
– Over time, currencies tend to adjust in response to these imbalances, because persistent surpluses generate foreign demand for the currency.
2. Reversal of Eurozone Capital Outflows
– For much of the previous decade, European institutions and investors were heavy buyers of foreign assets, contributing to downward pressure on the euro.
– That trend has started to shift. As European interest rates normalize and domestic investment opportunities improve, capital outflows are easing.
– Repatriation of foreign assets and increased domestic investment could lead to greater demand for the euro in global markets.
3. Evolution of the Eurozone’s Fiscal Framework
– European countries have come to a consensus on more coordinated fiscal policy, especially with the implementation of joint recovery funds such as NextGenerationEU.
– Investment resulting from these coordinated efforts is starting to bear fruit, particularly in sectors like green energy and digital infrastructure.
– This transformation enhances the region’s long-term growth prospects, thereby increasing the attractiveness of the euro.
4. Reduced Reliance on U
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