Published on: 2026-03-10
This article is part of EBC’s Central Banks and Forex series. If you missed the first piece, start here: Why the US Sets the Price of Money, but China Sets the Direction.
The euro has appreciated significantly over the past year. After remaining near the low-1.00s for much of 2025, it surpassed 1.20 in late January 2026 before retreating to the 1.17 to 1.18 range in February. Despite this correction, the currency remains approximately 12% higher compared to the previous year.
While this appreciation may appear to reflect increased confidence, the implications for Europe are more complex. The euro area’s growth model remains heavily dependent on trade, much of which occurs in dollar-influenced pricing environments. Consequently, a stronger euro may generate positive headlines but can negatively impact corporate earnings.
An appreciating currency brings both benefits and challenges.
It makes imports cheaper. For Europe, that matters because so much of the continent’s energy and many key inputs are priced globally, often in dollars. A stronger euro lowers the local-currency bill for oil, industrial metals, and many traded goods. Over time, that can cool inflation.
Conversely, a stronger euro makes European exports less competitive. Foreign buyers perceive European goods as more expensive, even if production costs remain unchanged. In an environment characterised by increased tariffs, narrower profit margins, and heightened competition, such price shifts can determine whether buyers continue or discontinuepurchasing European products.
This trade-off matters more for Europe than for many peers because Germany and several northern European economies are export-heavy. In 2024, Germany’s exports of goods and services were about 42% of GDP.
Therefore, fluctuations in the EURUSD exchange rate represent a significant determinant of profitability for a substantial segment of European corporations.
Germany exemplifies the effects of a strong euro most clearly, as it is Europe's industrial core.
The backdrop is already tough. German manufacturers are juggling weak external demand in key markets, rising competition in machinery and autos, and more trade uncertainty. Recent reporting has highlighted how trade friction alone could materially hit German activity if it escalates.
Additionally, currency appreciation places further pressure on exporters in two primary ways:
It can reduce volumes if customers switch suppliers.
Even if volumes hold, it trims euro revenues when foreign sales are converted back into euros.
Germany’s trade numbers are not collapsing, but they are not booming either. Destatis reported 2025 goods exports of about €1.56 trillion, only slightly higher than 2024, and the trade surplus is narrowing.
In response, Germany has adjusted its fiscal policy. The 2026 draft budget proposes record public investment of €126.7 billion and a substantial increase in defence spending.
This development is significant for financial markets, as it introduces competing forces:
Fiscal stimulus supports domestic demand and parts of the economy that do not rely on exports.
A strong euro exerts downward pressure on the tradable sector at a time when Europe is attempting to restore economic momentum.
The most immediate impact of a strong euro is evident in corporate earnings guidance.
A useful rule is that global European companies often include “FX sensitivity” lines in their investor decks. They are not perfect, but they give you a map of who is exposed.
Recent company warnings have put numbers on the impact:
The German software giant SAP SE has said that a 1 cent rise in the euro-dollar exchange rate could reduce annual revenue by about €30 million.
Schneider Electric has flagged FX impacts on revenue that can run into the €1.25 billion range in certain conditions.
Reporting has also cited examples like HelloFresh adjusting expectations based on euro moves.
Two factors contribute to the market relevance of these developments.
First, these are often high-quality companies. The earnings hit is not about operational failure. It is about currency translation.
Second, it creates sector divergence. Export-heavy names can look “cheap” on valuation screens and still struggle if FX keeps grinding against them, while domestic and import-heavy businesses quietly benefit.
The European Central Bank (ECB) plays a central role in sustaining the relevance of this issue.
At the 5 February 2026 meeting, the ECB kept rates unchanged: 2.00% on the deposit facility, 2.15% on the main refinancing operations, and 2.40% on the marginal lending facility.
Inflation is no longer the fire it was. Eurostat’s flash estimate put euro area inflation at 1.7% in January 2026. And a Reuters poll of economists expects inflation to average about 1.8% in 2026, with growth around 1.2% this year.
Thus, the ECB faces little pressure to raise interest rates and is not compelled to implement rate cuts.
That is why a stronger euro becomes a “weak spot”. If the currency keeps appreciating, it can pull inflation down further through cheaper imports, making it harder to keep inflation near the target. Analysts have argued that this dynamic is one of the few realistic paths back to rate cuts, even if the ECB would rather stay put.
Although the ECB does not explicitly target the exchange rate, it closely monitors currency movements, particularly when inflation remains subdued.
In emerging markets, a strong euro does not necessarily signal a 'risk-on' indicator. The implications depend on the underlying reasons for the euro’s appreciation.
If the euro is rising because the dollar is weaker and global risk appetite is steady, that can be supportive for many EM assets.
If the euro is rising in a more defensive manner because investors distrust US policy direction or seek diversification, it can create odd cross-currents. One channel is trade:
European capital goods become pricier for EM buyers.
EM exporters selling into Europe can become more competitive because Europe can buy more foreign goods per euro.
Another channel is relative rates. If markets start pricing renewed ECB cuts because the euro is too disinflationary, European yields can drift lower at the front end, reshaping carry and cross-rate behaviour.
For participants in foreign exchange, equity indices, metals, or energy markets, a strong euro typically manifests in the following ways.
While EURUSD strength often attracts attention, a more informative indicator is whether the appreciation is broad-based (trade-weighted) or primarily reflects dollar weakness.
Watch how EURJPY behaves. If the euro rises while the yen stays weak, European exporters can get less relief from cross rates.
Periods of euro strength often increase the performance gap between export-oriented benchmarks and domestically focused companies. Large-cap German firms may experience greater negative effects than aggregate European indices suggest.
A stronger euro tends to exert disinflationary pressure. If market participants anticipate ECB rate cuts later in the year, short-term yields may decline even if economic growth remains subdued.
Even if global gold prices remain stable, a stronger euro typically results in lower euro-denominated gold prices. This is relevant for European investors who view gold as a hedge. A stronger euro reduces the euro cost of dollar-priced oil. That can ease inflationary pressure, but it can also signal that Europe is leaning on cheaper imports rather than stronger exports.
Silver functions as both a precious and an industrial metal. A strong euro can reduce input costs for European industries; however, if euro appreciation signals weaker European growth expectations, investor enthusiasm may be limited.
To maintain the relevance of this analysis over time, each update can be structured around a concise checklist:
Where is EURUSD trading relative to its recent high, and is the move broad or just dollar weakness?
ECB language on inflation undershooting risk and financial conditions.
Export and orders data out of Germany, plus any fresh fiscal headlines.
Earnings season “FX sensitivity” comments, especially from big exporters.
A strong euro is not inherently detrimental. It reduces import costs and can contribute to lower inflation.
But if the euro stays firm while growth is only creeping forward, it creates a specific kind of pressure: exporters take the hit first, guidance follows, and policymakers start talking about the currency without admitting they are talking about the currency.
For market participants, the key insight is to avoid interpreting euro strength as a general indicator of European economic strength. Instead, it should be viewed as a regime that redistributes advantages and disadvantages across foreign exchange, equity, and fixed income markets.
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