rahul.khanna's picture

Europe may finally be turning around? Outlook for EUR & GBP

Europe's economy is likely to grow further and this may help EUR retrace losses seen from December to March (except vs. GBP). Many economists believe that the Eurozone growth will clock around 0.5 percent in the first quarter of this year (QoQ). This forecast, if true, will put the Eurozone ahead of the UK which has been leading Europe's biggest economies. With 60 Billion Euros a month stimulus only having began in March and 10y Bund yields having recently spiked, we see growth rising in the Eurozone.

We see several underlying factors supporting our view of the Eurozone economy: firstly a weaker Euro; secondly the QE; thirdly the low oil price. We don’t see the last two factors changing considerably, given that the ECB is showing no hints of curtailing QE early and crude oil production continues to be heavy along with a less strong Chinese economy. 

Greece remains a worry, but given that the ECB & Greek electorate both want Greece to remain in the Eurozone and Greece's limited options in securing a funding, we see Grexit as unlikely. 

Our top currency going ahead is GBP due to a clear mandate in the general election for the Conservatives. David Cameron & George Osborne are likely to push for tough public sector cuts to balance the books. However, the effect on the UK economy due to the public sector cuts is likely to be offset by stimulus in Europe as it still remains the UK's biggest exporter.