Synopsis:

MUFG sees potential support for the euro from rising optimism over German fiscal stimulus and the upcoming ECB meeting. Reports suggest that Germany’s centrist parties are discussing two large fiscal funds for defense and public investment, which could boost growth and narrow the US-German yield gap. However, Trump’s potential tariff hikes could outweigh these positives.

Key Insights:

1️⃣ German Fiscal Stimulus Talks Gaining Traction 💶

• Reports suggest that Germany is discussing two large fiscal funds outside the constitutional debt brake, each potentially exceeding EUR 200 billion.
• One fund would be dedicated to defense, while another could be focused on public investment to secure broader political support.
• If approved, this would boost German growth prospects and support EUR.

2️⃣ US-German Yield Differentials Continue to Narrow 📉

• The 10-year US-German bond yield spread has shrunk from 2.3pp in December to 1.8pp.
• A narrower yield differential generally favors EUR/USD upside, making the euro more attractive.

3️⃣ Geopolitical Developments Increasing Pressure for EU Spending 🏛️

• Trump’s recent tensions with Ukraine and US foreign policy shifts are increasing the urgency for higher European defense spending.
• This could further reinforce the case for more aggressive EU fiscal stimulus.

4️⃣ ECB Meeting Could Deliver a ‘Hawkish Cut’ 📊

• The ECB is widely expected to cut rates by 25bps on Thursday.
• If the ECB signals a pause in April, it could provide further support for the EUR.
• Markets will be closely watching Lagarde’s tone regarding future policy direction.

5️⃣ Trump Tariffs Pose a Key Downside Risk ⚠️

• Potential new tariff announcements from Trump this week could overshadow euro-positive factors.
• If the US imposes higher tariffs on the EU, it could drag EUR/USD lower despite fiscal stimulus optimism.

Conclusion:

While fiscal stimulus optimism and a potential hawkish ECB cut could support the euro, Trump’s tariff decisions remain a major wildcard. If tariffs escalate, EUR gains could be limited, but in the absence of aggressive trade actions, EUR/USD could see further upside this week.