Euro: Set to outperform Pound, US Dollar and Yen - Nomura

Nomura strategists see greater fiscal vulnerabilities in the United Kingdom (UK) than in the Euro area. Strong foreign inflows into Euro area bonds and comparatively better debt dynamics support its view that Euro (EUR) should outperform British Pound (GBP), US Dollar (USD) and Japanese Yen (JPY).

Euro area fiscal resilience supports EUR outlook

"For much of Europe, we see fewer downside risks from potential political uncertainty than in the past. In the past, the biggest risk/uncertainty factor associated with populist right-wing governments in Europe was the risk of a country leaving the euro area or the EU. However, the likes of RN in France and AfD in Germany, while still eurosceptic, no longer propose such extreme measures."

"Overall, we see GBP as facing the biggest risks in this regard in Europe. The Labour government in the UK under new PM Andy Burnham is trying balance improving growth without causing inflation, while maintaining fiscal credibility and delivering on spending commitments. With much higher debt-to-GDP than the euro area aggregate, which has risen at a faster rate, and with rising net interest payments in the years ahead, fiscal vulnerabilities seem unlikely to disappear any time soon."

"For the euro area as a whole, there is much less risk, in our view. For all of France’s concerns, these can be offset from a currency perspective by the much better positions of the likes of Germany and Spain, as noted earlier. For the Big 4, rising government interest payments may become more of a concern in the years ahead, but they should remain comfortably below the UK and US."

"Foreign inflows into euro area debt have surged in recent months, suggesting that overseas investors see the higher yields on offer as being more than enough reward for the relative risk being taken on. Indeed, we are currently looking for EUR to outperform both USD and JPY where fiscal dynamics look much more challenging."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)