Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why the Euro Is Flat While European Stocks Climb
Transcript
- Lucas: So, Luna, here's something that's been bugging me all week. European stocks keep climbing—VGK, the broad European ETF, is up one point two percent in five days—and yet the euro is just... flat. Stuck around one point one six against the dollar. That's a weird combination. Luna: It is weird. Normally when equities rally, you'd expect some currency strength too. But the euro's been dead weight for a while now. Lucas: Right. And it's not just this week. Look at the trade-weighted dollar index—it's actually ticked down a bit, from one hundred nineteen point one eight to one hundred eighteen point nine. So the dollar is softening broadly. Yet EUR/USD hasn't budged. That's the puzzle. Luna: So what's holding the euro down? Is it the ECB's doves or just the market's lack of conviction? Lucas: I think it's a bit of both. The market has priced in a very slow normalization path for the ECB. They cut rates last year and again earlier this year, and the expectation is they'll stay cautious. Meanwhile, the US, for all its fiscal drama, still has higher nominal yields. That keeps the dollar bid, at least against the euro. Luna: But if the dollar is weakening on a trade-weighted basis, shouldn't the euro catch a bid? I mean, the dollar index is down, so something else is weakening too—probably the yen and the Canadian dollar. Lucas: Exactly. The yen dropped to one hundred fifty-nine point two per dollar, and the Canadian dollar is sliding amid trade-war fears. So the dollar is weak against the euro, but it's strong against those other currencies. The euro is just kind of stuck in the middle. Luna: So the euro's inertia is partly a story of relative weakness elsewhere. That makes sense. Lucas: And here's the thing—this flat euro is actually helping European exporters. If the euro were rallying with stocks, you'd see pressure on companies that sell abroad. But with the euro pinned, those firms get a tailwind. Look at the UK, up one point nine percent this week, or Spain, up one point eight. Those are export-heavy markets. Luna: So the markets are cheering because the currency is staying competitive. That's a nice dynamic for equities, but it also suggests that the eurozone's recovery is still heavily dependent on exports rather than domestic demand. Lucas: That's a really good point. And it ties into something we've touched on before—the services surplus that's been closing. The eurozone has been running a goods surplus for years, but services have traditionally lagged. Now that's changing, but the currency isn't reflecting it. Luna: Why do you think the currency isn't reflecting the improving trade picture? Is it just rates? Lucas: Partly. But I think it's also about the ECB's communication. They've been very clear that they're not in a hurry to normalize further. That gives investors little reason to buy euros. And with the Fed potentially doing buybacks—there's talk Bessent could tap the Treasury General Account for nearly a trillion dollars—that's a us specific story that keeps Treasuries bid, and by extension, the dollar. Luna: But those buyback headlines are also stirring inflation worries in the US. That could eventually undermine the dollar, right? Lucas: Sure, in the long run. But for now, the market is focused on the near-term yield advantage. And as long as the Fed is on hold or even considering easing, but the ECB is seen as even more dovish, the euro stays flat. Luna: So what would it take to break the euro out of this range? A surprise hawkish turn from the ECB? Lucas: That would do it. Or a real acceleration in Eurozone wage growth that forces the ECB to reconsider. We've talked about how wage growth is the ECB's next headache. If that feeds through to services inflation, the doves might have to back off. Luna: But the data we've seen so far suggests inflation is getting stickier, not hotter. The last CPI print showed services inflation holding steady. So maybe the ECB can afford to wait. Lucas: Right, and that's the market's view too. The real test will be the next round of negotiated wage data in Germany and Spain. If those come in hot, the euro might finally get a jolt. Luna: Speaking of jolts, let's talk about what's happening in the broader European equity space. I mean, UK stocks are up nearly two percent this week—that's a big move. What's driving that? Lucas: A lot of that is the weaker pound—the Canadian dollar story is spilling over, and the pound is also under pressure. That's a boon for the FTSE, which is packed with multinationals earning in dollars. So you get this classic trade-off: weak currency, strong stocks. Luna: And it's the same in the eurozone, just less pronounced because the euro isn't falling as much. Lucas: Exactly. The euro is flat, the pound is down, and the Canadian dollar is in freefall. So European equities are benefiting from a broad dollar strength narrative, even as the dollar index softens. It's a bit of a paradox. Luna: It's like the market is saying: 'US exceptionalism is fading, but the alternatives aren't great either.' So you buy European stocks but you don't buy European currencies. Lucas: That's a neat way to put it. And it's a pattern we've seen before. Remember the 2015-2016 period? The ECB was doing QE, the euro fell, and European stocks had a great run. The currency weakness was a feature, not a bug. Luna: Except back then, the euro was falling outright. Today it's just flat. So the question is: does the euro need to weaken further to keep the rally going? Lucas: I don't think so. The eurozone's export competitiveness is still solid. The trade-weighted dollar is down, so European goods are relatively cheaper. That's enough to support earnings without a weaker euro. Luna: But if the ECB does surprise with a hawkish tilt, the euro could pop, and that might put a damper on the equity rally. It's a delicate balance. Lucas: Absolutely. And that's why the ECB's communication is so crucial. They've been masterful at managing expectations, but the risk is that they're painted into a corner. If inflation stays sticky and wage growth accelerates, they'll have to move, and that could unsettle markets. Luna: So for now, we're in this sweet spot where the euro is flat, stocks are grinding higher, and exporters are happy. But it's a fragile equilibrium. Lucas: Fragile, yes. But as long as the data doesn't force the ECB's hand, I think we can expect more of the same. The risks are skewed toward a sudden move, though—either from the ECB or from a US fiscal shock. Luna: And that's what we're all watching. The Treasury buyback story is a big one. If Bessent pulls the trigger on that trillion-dollar buyback, it could flood the market with liquidity and weaken the dollar further. That might finally give the euro a lift. Lucas: Or it could stoke inflation fears and send Treasury yields higher, which would actually strengthen the dollar. It's a coin flip. Luna: I guess that's why the euro is just sitting there, waiting for a catalyst. Lucas: That's the thing about currencies—they hate uncertainty. And right now, there's plenty of it. Between the US fiscal situation, the trade war with Canada, and the ECB's cautious stance, it's no wonder the euro is in a holding pattern. Luna: It also makes you wonder if the market is underestimating the eurozone's resilience. If exports keep doing well and the services surplus keeps closing, maybe the economy doesn't need a weaker currency. Lucas: That's a fair point. And it ties back to something we've discussed before—Europe is quietly winning the export race, not just in goods but in services. If that trend continues, the euro could eventually find support from fundamentals rather than just rate differentials. Luna: So maybe the flat euro isn't a sign of weakness, but a sign of stability. It's just not moving because the market doesn't see a reason to push it either way. Lucas: Exactly. It's a market that's waiting for a catalyst, but the fundamentals are actually pretty solid. And that's a good note to end on, because it's a reminder that sometimes stability is underrated. Luna: And if you want to keep hearing about the European economy from us, the best way to support the show is to buy us a coffee. You can do that at buy me a coffee dot com slash fexingo. It keeps us ad-free and independent. Lucas: Yeah, we really appreciate that. It lets us keep digging into these stories without worrying about sponsors. Luna: And on that note, let's get back to the euro. What's the one thing you're watching next week that could break this range? Lucas: The German wage talks, definitely. If those come in above expectations, the euro will move. Other than that, I'm watching the US inflation data, because that could change the Fed's calculus and indirectly affect the euro. Luna: So no shortage of potential catalysts. We'll be here to break it down. Lucas: That's it for today. Stay curious, and we'll catch you on the next one.