The euro is on the rise, currently outperforming the dollar. This marks a clear win for the single currency. However, Citi analysts caution that further euro gains in 2025 could weigh on corporate profitability, potentially trimming earnings for European firms by nearly 2%. This is a case of currency strength carrying economic side effects.

So far this year, the euro has strengthened by 10% against the dollar, driven by a shift in investor strategy, with capital flows pivoting from US assets to Europe. This trend has been accelerated by mounting political uncertainty in the United States and improving macroeconomic outlooks across other regions.

Moreover, Citi forecasts an additional 5% rally in the euro from current levels, with the EUR/USD pair expected to reach the 1.2000 mark over the next 6 to 12 months.

However, challenges remain. According to the bank, many European companies are heavily reliant on exports, so a stronger euro could pose a significant headwind. Combined with lingering uncertainty surrounding President Donald Trump's tariff policy, these currency pressures could dampen corporate profits, particularly in sectors such as materials and energy.

Nevertheless, Citi advises investors not to panic. Historically, euro strength has often been offset by other supportive fundamentals. "Solid earnings per share growth remains possible when the euro is appreciating," the bank notes, adding that EPS in Europe typically climbs by around 10% twelve months after a meaningful rally in the currency.

According to Citi's currency strategists, companies best positioned to benefit from euro strength include Zalando, Redcare Pharmacy, Commerzbank, and PKO Bank. Conversely, firms that are likely to gain from a weaker euro include Finnish materials producer UPM-Kymmene, oil majors Shell and BP, and pharmaceutical giants Novo Nordisk and AstraZeneca.