The Euro area's PMI and GDP data show a surprising acceleration, indicating the region's underlying economic strength is robust enough to overcome significant headwinds like the Iran conflict and high natural gas prices.
Beyond broad fiscal stimulus, Germany's increased defense spending is a specific, measurable catalyst for its manufacturing recovery. This is directly visible in industrial orders reports and cited by companies in PMI surveys as a reason for accelerating output.
JPMorgan estimates Germany's fiscal deficit has widened by two percentage points, which, with a fiscal multiplier close to one, translates into a powerful GDP impact of nearly 2% over 18-24 months. This quantifies the stimulus's effect beyond qualitative statements.
Despite a robust domestic growth story, the Euro is unattractive because US growth is also resilient, other global regions have stronger growth revisions, and the Euro's negative carry and overvaluation relative to energy prices make it a poor investment.
In a global "risk-on" environment, the Euro's low yield and relative overvaluation make it an ideal "funder." Strategists recommend shorting the Euro to finance long positions in higher-yielding currencies in both developed (Aussie) and emerging markets (Mexican Peso).