Hands up! Who thought the euro was down and out? And with the fear of Trump’s tariffs, did anyone expect it to hit parity again in 2025? Well, Trump’s tariff agenda and his recent stance on the war in Ukraine have changed the game.
The euro is on the move, climbing to a three-month high against major currencies, and all signs point to one key driver: defence spending. Investors are paying close attention as the European Union and its biggest economies ramp up military budgets in response to escalating geopolitical tensions. But why exactly is this leading to a stronger euro, and what does it mean for the markets?
The Fiscal Shift That’s Changing the Game
For years, the eurozone has been known for its cautious fiscal approach, often prioritizing budgetary restraint over aggressive investment. That’s now changing. With security concerns dominating policy discussions, European governments are loosening the purse strings and committing billions to defence. Germany, in particular, has taken a decisive turn, moving away from its traditionally conservative stance on military spending.
The German coalition government has just greenlit a €500 billion infrastructure and defence fund, effectively rewriting the country’s fiscal rulebook. This move, alongside broader EU initiatives such as the proposed €158 billion defence financing package, has injected new momentum into the European economy. Investors see this as a sign that policymakers are willing to do whatever it takes to shore up the bloc’s security and industrial base. And when confidence in economic resilience rises, so does the currency.
Market Reactions: Why Investors Are Bullish
The markets have responded decisively. The euro has climbed to its highest level in months, breaking through resistance levels against the U.S. dollar and British pound. European defence stocks have also seen a sharp uptick Rheinmetall, one of Germany’s largest defence contractors, surged 14%, while Sweden’s Saab AB gained 12%. The reasoning is clear: higher government spending means stronger demand for military goods, infrastructure projects, and supporting industries, all of which translate into economic growth.
At the same time, the European Central Bank (ECB) has remained steady, resisting pressure to cut interest rates too quickly. This has further fuelled the euro’s appeal, as investors seek higher yields compared to the Federal Reserve’s more dovish stance in the U.S.
The Bigger Picture: Strength Beyond Defence
While defence spending is the immediate catalyst, the broader implications are just as significant. This shift signals a willingness by European governments to invest heavily in strategic sectors, moving away from a period of fiscal austerity. A more proactive investment strategy could enhance the eurozone’s overall competitiveness, making the region more attractive for long-term investors.
In a world where economic uncertainty looms large, Europe’s newfound fiscal confidence is a game-changer. With defence budgets rising, infrastructure projects gaining approval, and monetary policy holding steady, the euro has found solid footing. And if policymakers continue down this path, the recent rally might just be the beginning of a longer-term appreciation.
Final Thoughts
For traders and investors, the key takeaway is clear: Europe is no longer sitting on the sidelines. The combination of increased government spending, resilient monetary policy, and renewed confidence in the eurozone’s future is shifting market dynamics in a big way. If these trends hold, the euro’s strength might be here to stay.
And I’m not sure if this was Trump’s original objective.
By James Trescothick
Head of Market Research and Market Analysis
Risk Disclaimer: This information is for educational purposes only and does not constitute investment advice. Financial markets involve risks, and past performance is not indicative of future results. Always conduct your own research and seek professional advice before making investment decisions.
