Deutsche Bank has changed its stance on the euro from bearish to neutral, noting a decline from 1.09 to 1.0480 over the past year. This adjustment reflects shifts in political dynamics affecting both sides of the trade.

The three German centrist parties are expected to support a large defence fund, potentially increasing German fiscal capacity. This development is seen as a move towards stability in Ukraine and aligns with a more conservative US fiscal policy, which has led to lower Treasury yields.

The bank perceives risks as evenly balanced for the coming months, with potential downside from trade policies and possible rate changes by the European Central Bank. Conversely, increased German fiscal activity and a resolution to the Russia-Ukraine crisis could present upside potential.

Future shifts in this view depend on developments in defence spending, as the complexity of altering fiscal systems may slow progress. Currently, Deutsche Bank is not anticipating a general weakening of the US dollar but remains attentive to possible indications of further easing from the Federal Reserve.

Deutsche Bank’s reassessment of the euro, moving from a bearish to a neutral stance, is a direct reaction to the changing fiscal and political environment. The drop from 1.09 to 1.0480 over the past year has been influenced not just by market forces but by broader structural shifts on both sides of the trade.

The backing of a substantial defence fund by Germany’s leading centrist parties could change how fiscal policy is managed. Greater flexibility in government spending may create a foundation for stronger economic support, particularly as it relates to stability in Ukraine. At the same time, a more restrained fiscal approach in the US has resulted in lower Treasury yields. These two forces together help shape expectations for the euro’s future direction.

For now, Deutsche Bank sees the risks to the euro as evenly divided. Trade policies continue to pose potential threats, particularly if protectionist measures gain traction. Meanwhile, decisions from European policymakers on interest rates could sway sentiment. On the other hand, an increase in German fiscal spending or a diplomatic breakthrough in the Russia-Ukraine conflict could shift the outlook in the opposite direction. These are not distant concerns—they are factors that could affect volatility in weeks rather than years.

Key developments in defence spending should not be overlooked. While the proposed fiscal measures are gaining political backing, the time required to implement them could be considerable. There is inertia in government budgets, and changing the existing framework rarely happens without delays. Given this, momentum in German spending levels will be watched closely. If capital deployment accelerates, the impact on markets will likely be reflected in how expectations for the euro evolve.

For the US dollar, Deutsche Bank does not currently foresee broad-based declines. That said, markets will remain highly responsive to any indications of further policy easing from the Federal Reserve. Any shift in that direction would introduce another layer of uncertainty, reinforcing why adjustments in positioning should be undertaken with a clear awareness of incoming signals.