Synopsis:

MUFG highlights that Germany’s pivot toward looser fiscal policy, combined with resilient eurozone yields and improving economic sentiment, is supporting further EUR/USD upside. The fiscal stimulus is viewed as cushioning against potential trade shocks from US tariffs, reinforcing the euro’s appeal.

Key Points:

• Yield Spreads Favor EUR:
  • US yields declined, but eurozone yields remained firm, tightening spreads in favor of EUR/USD.
  • Supported by improving data and a German fiscal pivot.

• IFO Survey Signals Confidence:
  • June IFO Expectations rose to highest since April 2023.
  • IFO President: “German economy is slowly building confidence.”

• German Budget: Fiscal Stimulus Through 2029:
  • EUR82bn in new debt for 2025, rising to EUR126bn in 2029.
  • EUR500bn total new borrowing over 5 years.
  • Public investment to average 2.5% of GDP, with defense spending targeted at 3.5% of GDP.

• Tariff Risks Still Linger:
  • Markets remain alert to the potential for reciprocal US tariffs (20–50%) from July 9, but the German stimulus provides a buffer.

Conclusion:

Germany’s expansive fiscal stance is boosting eurozone growth prospects, keeping yields elevated and strengthening the EUR/USD trend. MUFG sees this as a fundamental driver behind the euro’s strong 2025 performance so far, particularly in contrast to declining US yields and rising geopolitical uncertainty.