Original title: the euro zone economy is expected to rebound, the euro against the dollar may stand above 1.15

The euro rose against the dollar on Monday as euro zone PMI data were revised and the euro was boosted by a better-than-expected Sentix investor confidence index in January. Bank of America Merrill Lynch, an investment bank, reported that EURUSD would strengthen to 1.15 by the end of the year, supported by stable eurozone data, a weaker dollar and reduced tail risk.

The euro zone economy is improving.

The eurozone's growing reliance on services spending to support its expansion offset the decline in manufacturing, which was caused in part by international trade disputes and Brexit.

Investors have become more confident, with analysts saying the spectre of recession appears to have dissipated, but growth is expected to show only a "slight rebound". Chris Williamson, chief business economist at IHS Markit, said: without any significant adverse developments, we expect economic growth to start to improve as 2020 advances. Nevertheless, the downside risks to economic growth in the coming year are still significant.

The initial annualized rate of non-quarterly CPI in the euro zone in December was in line with expectations, and the euro fluctuated little against the dollar. But with eurozone CPI rising since its July low in the second half of 2019, the December data continued to strengthen, which could make it difficult for the ECB to ease monetary policy further at its regular meeting at the end of January 2020.

ECB President Christine Lagarde did not change ECB policy when she made her first interest rate decision and announced a strategic review. Although the ECB is looking for a new direction, the rise in CPI may prompt it to choose a tougher policy. A change in the ECB's extreme dovish mood, if only in tone, would unleash the potential of the euro against the dollar.

After three months of contraction, the German economy has returned to marginal growth. Both Spain and France have achieved strong expansion. New jobs increased for the first time in four months, and corporate optimism improved. There was also better news from the UK that services indicators were revised upwards in December, with new orders rising at the fastest pace in five months. However, Italy's private sector shrank for the second month in a row, its worst performance in nearly a year. Euro zone exports fell for the 15th month in a row. The payroll is growing at its slowest pace in five years.

The euro may strengthen against the dollar

Bank of America Merrill Lynch, an investment bank, said in a report that EURUSD was expected to strengthen to 1.15 by the end of the year, supported by stable eurozone data, a weaker dollar and reduced tail risk, but even if the euro was expected to strengthen, it was still undervalued.

President Trump's policies have pushed the dollar above equilibrium for at least the past two years and will gradually bring the dollar back to equilibrium as these policies fade, the report said. The bank's team of economists predicts that the impact of fiscal stimulus will be completely over and that US economic growth this year will be slightly below potential.

However, the bank does not expect another round of fiscal stimulus ahead of the US presidential election, while the recent international trade situation and suspension have avoided further escalation of tensions. As for the shelving of trade talks between the United States and the European Union, it means that the two sides will continue to have a truce at least before the US election.

The BofA Merrill Lynch team of economists expects economic growth in the euro zone to remain below potential, but to stabilize, with the US and euro expected to grow by 1.7 per cent and 1 per cent respectively this year; the gap between the two narrowed from 2.3 per cent and 1.1 per cent respectively last year. The bank reported that the euro was considered undervalued in August 2019, and while the current situation remains the same, it more reflects that the dollar is overvalued. The euro is currently one standard deviation below its 20-year average, by which the dollar is the most overvalued of the G10 currencies, followed by the Swiss franc. However, the Swedish krona, the Norwegian krona, the yen and sterling are more undervalued than the euro.

Bank of America Merrill Lynch said that according to the bank's estimates, the market is slightly bullish on the euro. The overall position of the euro, relative to the G10 and emerging currencies, has become neutral in the second half of the year from its short position in the first half of 2019, with a slight bearish position at the end of the year. Real currencies are particularly bullish on the euro, but hedge fund positions are neutral. The report points out that the weakness of the euro over the past two years is consistent with the relevant data, especially last year, when the US economy was weak, but because growth was above potential and in line with market forecasts, while the eurozone economy weakened because growth was lower than potential and market forecasts.

Looking ahead, the report expects relative growth to gradually turn positive for the euro. Although the bank's economists still expect economic growth in the euro zone to be lower than that in the United States, the gap will narrow, and historical correlation suggests that the euro will be less undervalued. Capital macro: the euro zone's composite PMI was slightly revised up in December, but combined with other information, our bank believes that this still implies that the euro zone's economic growth was only 0.2% in the fourth quarter of 2019, while Germany and Italy's indicators are also in line with economic contraction.

At 16:06 on January 7, 16: 05 Beijing time, the euro is now trading at 1.1174 against the dollar.