The end of the summer holidays has brought with it increased activity in the foreign exchange market, to the point that it's influencing equities worldwide. The strength of the euro has been the common denominator in financial markets. Indeed, the euro has surpassed the $1,20 mark for the first time since 2015. This strength is leading to an adjustment in the prices of major international currencies and prompting many investors to adjust their portfolios as they return from vacation. This has become one of the most significant news stories of August.
Since the central banks met in Jackson Hole (United States), the euro has appreciated by almost 3% . Certainly, one of the reasons for the remarkable strength of the single European currency is linked to the monetary policy of the European Central Bank. In this regard, the comments made by the President of the European Central Bank (ECB) regarding the positive performance of the European economy cannot be overlooked. These comments have been interpreted by financial markets as a warning about the withdrawal of stimulus measures by the ECB.
In any case, the euro has been on an upward climb since the beginning of the year, especially against the US dollar. This is being closely watched by various financial players, although they are unable to predict the euro's potential ceiling in the coming days. There is significant resistance at the $1,35 level , which would suggest further appreciation towards the end of the year. One thing is certain: the currency market has once again taken center stage, with a notable increase in volatility, as can be seen in recent days.
The euro stronger than ever
The euro has recently reached a high of $1,205 against the US dollar, a level not seen in recent months, or even the last three years. This means the European single currency has appreciated by a remarkable 15% so far this year, establishing itself as one of the most profitable financial assets of the year, even outperforming equity markets, which have seen an average return of 10% across major international exchanges. Investors have once again turned their attention to currency trading, although it is primarily experienced investors who are opening positions after returning from their summer break.
In any case, one thing is certain for savers: the upward trend of the US dollar has ended. This trend lasted much longer than expected, having actually been developing since 2014. This opens a new scenario for the investment world, and specifically for equity markets, precisely at a time when no one, or at least very few financial analysts, had anticipated it. In any case, it's a new situation that small and medium-sized investors will now have to navigate.
Impact on the stock market
While this is good news for the European economy, it's not so good for the stock market in general. It reflects an improved state of the European business sector, but with serious repercussions in other areas of the economy. Given this new scenario, it's not good news for the stock market or for investors. In this sense, the strengthening euro has led to widespread declines in all European stock market indices. Specifically, the Eurostoxx 50 has fallen by almost 2% over the past week , and its trend appears to be downward, at least in the short term.
With a depreciation in almost all sectors, almost without exception. It is not the time, then, to enter the equity markets, but it is more advisable to wait a few days to see what the evolution of the currency market is from now on. Of course, the downward drip of the stock indices is a reflection of the new reality that has been imposed on the foreign exchange market.
Benefits of a strong euro
In any case, there are some advantages to a high exchange rate for the euro. For one, it reduces the cost of importing goods from outside the European Union. For example, oil purchases on the financial markets are cheaper because the price of transactions is set in dollars. Furthermore, it boosts the credibility of the European project at a time when there are many doubts about its future. It also indicates that the economy in this region is performing better than some economic reports have predicted.
But the interests of the economy don't always align with those of the financial markets. It's very difficult to please everyone. Furthermore, the sharpest change isn't just with the US dollar, but also with the British pound. Indeed, the exchange rate with this financial asset is at 0,9299 pounds per euro, levels not seen since the end of 2009. The effects of Brexit are closely linked to these currency market quotes, to the point that they could worsen in the coming weeks.
Disadvantages in the appreciation of the euro
A strong euro, on the other hand, has negative effects. One of the most significant is the increased cost of exports , to the point that it could cause serious imbalances in the European economy. Currency tensions could also lead to sharper declines in European stock markets, with certain stocks potentially more susceptible to these downward movements, such as those in the important banking sector.
It's important to remember that if economic stimulus measures are withdrawn in the Eurozone, large financial groups would be the hardest hit, more so than other stocks. Companies with high levels of debt will also find it more difficult to address this issue in their bottom line. These are the victims of this scenario, and you should keep them in mind when building your investment portfolio once you return from vacation. Similarly, you'll find it more challenging to trade in the currency markets due to a significant increase in volatility starting in September.
How to adjust investments?
One of the strategies you'll need to consider is how to manage your savings from this point forward. This might be the most opportune moment to reduce your holdings in European equities and move towards other regions with greater potential for stock market appreciation. Regarding sectors, commodities could be a good choice, particularly oil, which may offer more than one positive surprise starting in September. As for fixed income, investing in peripheral bonds could be highly recommended, but only for very short terms. They currently offer a very favorable risk-return profile for investors.
In this regard, importing companies will be one of the safest bets for choosing an effective investment portfolio. Furthermore, significant capital gains could also be obtained through the foreign exchange market. However, this will require extensive experience in this type of operation, as it must be very quick and, ideally, executed within the same trading session—that is, through intraday trading . It is, after all, one of the most active financial markets, especially with all the changes related to the single European currency.
In any case, one thing is clear: the strength of the euro will generate new relationships among different financial assets. This newsworthy event, which has emerged at the end of the holidays, should be leveraged. This situation with the euro should, in all cases, serve as an opportunity to explore new business opportunities. These will undoubtedly arise from various investment fronts. The only remaining question is whether this situation with the euro is temporary or if, on the contrary, it will persist for longer than financial analysts have anticipated. In any case, one of the keys to this scenario will be whether the exchange rate surpasses 1.25 or 1,30 dollars , which could potentially lead to further price increases. We will only have to wait a few weeks to see how this financial market develops.