Why Euro ETFs Could Be A Winning Bet In 2019

Euro has been under pressure this year on the double whammy of policy divergence in the United States (where monetary policy is pretty hawkish) and the Euro zone (where the ECB has been tapering the QE policy dovishly) as well as the slowdown in the euro area economy (read: Eurozone Slows Down in Q2, Puts These Country ETFs in Focus).

Invesco CurrencyShares Euro Currency (FXE - Free Report) is down 3% this year (as of Sep 24, 2018). However, the fund has added about 0.7% in the past month and may turn around in the days ahead buoyed by the following factors.

ECB Policy Tightening

The European Central Bank’s (ECB) chief Mario Draghi sees a “relatively vigorous” uptick in underlying euro-area inflation. The bank went on to say that “the tightening labor market is pushing up wage growth." This indicates that the central bank may hike rates for the first time since 2011 late next year, per Bloomberg.

Benoit Coeure, who will likely replace Draghi in November 2019, said that he would prefer to chalk out economic conditions that validate higher borrowing costs. This is especially true given that the annual inflation rate in the euro area was 2% in August 2018, slightly below the previous month's five-and-a-half-year high of 2.1%.

As of now, market watchers see the lift-off around October 2019, per Bloomberg,. The euro has jumped on ECB remarks, touching the highest level since June (read: ECB May Hike Rates After Summer 2019: ETFs to Gain).

US to Do More Trade Europe Instead of China

According to Deutsche Bank AG, Europe’s common currency is set to trend higher toward $1.20, a level last seen in May, as the United States replaced Chinese imports with those from the Euro bloc. The U.S.-China trade tensions have been widespread in the third quarter with the Trump administration levying more tariffs on Chinese goods worth $200 billion.

The tariffs started at 10%, beginning Sep 24, and will shoot up to 25% on Jan 1, 2019. Beijing hit back with an additional $60 billion in American goods. Notably, Trump has already enacted 25% tariffs on $50 billion in Chinese goods, which has been retaliated by China, mainly targeting American soybeans along with other goods (read: US-Sino Trade War Escalates: Most Vulnerable Sector ETFs).

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