Commerzbank HQ dominates the Frakfurt skyline. Image © Andre Douque, reproduced under CC licensing conditions

The Euro is currently enjoying a good run on global foreign exchange markets and with a thin event calendar we believe there is little reason to doubt that the outperformance can continue in the near-term.

However, this sentiment is not shared by analyst Esther Reichelt at Germany's Commerzbank who is of the opinion the Euro strength is ultimately likely to be fleeting.

Reichelt is cautious that the growing trade conflict between the US and the rest of the world could ultimately lead to a Eurozone recession, which would of course oblige the European Central Bank to maintain 'easy' monetary policy conditions - the exact kind of conditions that have been responsible for a weak Euro for years now.

Above: The Euro is the best performing major currency over the course of the past week.

"But even without the risks of a trade war, I see more downside risks for the euro over the coming days," says Reichelt in a foreign exchange briefing to clients.

The analyst says the upcoming EU summit can be viewed as the next important event to provide momentum for the Euro.

"There had been such high hopes amongst FX market participants that ambitious euro zone reforms would strengthen the structural stability of the single currency. In view of the government crisis in Germany hopes of this nature have been dashed," says Reichelt. "It is more likely that the differences within the Eurozone will become more obvious as a result of the migrant question."

The analyst says such an outcome means the ECB’s main task will once again be to keep the Eurozone together with an expansionary monetary policy and will take only very cautious and slow steps towards normalisation.

"So that the rate differential between the US Dollar and the Euro is likely to remain manifest for years to come, even if the long term outlook in the US was likely to deteriorate at some stage," says Reichelt.

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