Forex Review. The euro has become more expensive
Don’t put your eggs in one basket. After America’s Liberation Day, investors so zealously began rotating portfolios in favor of cheap stocks in Europe and Japan that they ran out very quickly. On the contrary, US technology companies have fallen in price. At the same time, NVIDIA’s strong corporate reporting has started the reverse process. Money is flowing back to the United States. At the same time, the volume of hedging by selling dollars is growing. Is the EURUSD rally surprising in response to the S&P 500’s willingness to restore an uptrend?
Cheap stocks outside the United States are not so easy to find! Their share in terms of price to forward earnings has decreased over the past year in Europe from 15% to 3%, and in Japan from 8% to 2%. On the contrary, the share of European securities with a P/E above 33 jumped to 13%.
According to Bloomberg experts, the EuroStoxx 600 has reached its ceiling. It is unlikely to grow significantly from current levels. Many positive factors have already been taken into account, and corporate profit expectations are clearly overblown. All this keeps investors from buying Europe.
America and the much cheaper Big Technologies, on the contrary, regain the role of a tasty morsel. At the same time, hedging currency risks looks mandatory. Investors are used to working on the “buy and hold” principle. For them, the potential strengthening of the greenback in the short term means nothing. If the futures market believes that the federal funds rate will fall in 2027, and pressure from the White House will undermine the Fed’s independence, selling the US dollar is a necessity.
Rafael Bostic, who is retiring, expressed concern about the pressure on the central bank. According to the president of the Atlanta Fed, the legal and rhetorical battles around the Fed are making people doubt its independence. And this is a serious problem. Looking at how Donald Trump does not stop even after the verdict of the Supreme Court on the illegality of tariffs, you understand that sooner or later this man will get his way on the rates.
Investors are looking to the future. This is the only way to explain the EURUSD rally against the background of a decrease in the probability of easing the Fed’s monetary policy in June to 46%. A week ago it was 62%.
One can, of course, refer to the fact that the tariff refund risks taking a long time, which means that the US economy will not receive the necessary fiscal incentives in the near future. However, this factor clearly loses out to hedging currency risks.
