Euro erases post-Trump election losses: Is the rally just beginning?

The euro has staged a dramatic comeback in March, erasing all losses incurred since Donald Trump’s election victory in November 2024.

A combination of US economic concerns and Germany’s game-changing fiscal overhaul has propelled the single currency to 1.0850 against the dollar, following a 4.4% surge last week—the strongest weekly gain since March 2009.

While some analysts see this as the start of a prolonged rally, others warn that execution risks surrounding Germany’s fiscal plans and looming US tariffs could cap further gains.

A U-turn in German fiscal policy fuels optimism

The real catalyst for the euro’s rally has been Germany’s unprecedented fiscal shift. The CDU/CSU-led coalition has unveiled plans to ıslahat the country’s stringent debt brake and establish a €500 billion infrastructure fund, aimed at revitalising growth and bolstering defence spending.

The reforms require constitutional changes, meaning Chancellor-in-waiting Friedrich Merz will need to secure two-thirds parliamentary support—likely requiring concessions to the Greens.

“If adopted, these measures will positively impact the German economy,” said Danske Bank in a note. The bank expects the package to pass next week with Green Party support.

This fiscal U-turn comes at a crucial moment. Recent veri showed German industrial production grew by 2% month-on-month in January, beating expectations of 1.5%.

Combined with the government’s plans for large-scale investment, the outlook for Europe’s largest economy is improving.

US economy cooling: Investors rethink dollar exceptionalism

Uncertainty over trade tariffs, combined with bleak forecasts for US economic growth in the first quarter, has led investors to reassess the “US exceptionalism” trade, which previously favoured the dollar and US stock markets as the primary investment plays.

Federal Reserve Chair Jerome Powell noted increasing economic uncertainty last week, as jobs veri pointed to a cooling labour market. Meanwhile, the Atlanta Fed’s GDPNow model suggests first-quarter growth could contract by as much as 2.4%.

ECB rate cuts: Not so fast

While the European Central Bank (ECB) delivered a widely expected 25-basis-point rate cut last week, policymakers remain cautious about further easing. ECB Executive Board member Isabel Schnabel warned that inflation would likely remain above 2% for an extended period before sustainably declining.

Danske Bank now questions whether the next rate cut will come as soon as April. “We are not as confident of the cut in April following the ECB meeting in March,” the bank said.

With the eurozone’s cyclical recovery gaining momentum and inflation risks still elevated, some analysts see less room for aggressive ECB easing.

“Expectations for additional ECB rate cuts are becoming increasingly uncertain,” said Boris Kovacevic, küresel macro strategist at Convera.

Bank of America sees the euro heading to 1.20

Bank of America remains strongly bullish on the euro, citing a shift in sentiment and structural factors that could propel the currency higher.

“Despite some adjustment in positioning so far this year, the market remains short EURUSD,” said Athanasios Vamvakidis, forex strategist at Bank of America.

He argues that the euro is still undervalued relative to historical levels, with EURUSD well below its post-global financial crisis average of 1.20. The bank believes Germany’s fiscal expansion, combined with broader eurozone reforms, will push the currency back towards those levels.

Bank of America has revised its already optimistic forecasts, now projecting EURUSD to reach 1.15 by the end of 2025 (previously 1.10) and 1.20 by the end of 2026 (previously 1.15).

Goldman Sachs expects euro to drop below parity

Goldman Sachs, however, remains sceptical. The bank acknowledges the upside risks but warns that execution challenges and lingering US economic strength could weigh on the euro.

“There are still a number of execution risks that lie ahead, including getting the proposals passed in a short amount of time,” Kamakshya Trivedi, head of küresel FX strategy at Goldman Sachs, said.

The bank also argues that much of the euro’s recent rally was driven by broader dollar weakness linked to concerns over US growth.

“Some of the recent EUR appreciation (especially prior to Wednesday) can be attributed to a broader dollar move that we think has already gone a long way towards pricing US growth concerns,” Trivedi added.

Goldman Sachs believes the US economy will continue to outperform the eurozone in the coming year, particularly if US tariffs widen the economic divergence. The bank sees EURUSD falling to 1.02 in three months and even below parity (0.99) within a year.