Market News Goldman Sachs remains bullish on medium-term euro outlook, targeting 1.15 a year from now
Goldman Sachs remains bullish on medium-term euro outlook, targeting 1.15 a year from now
Goldman Sachs FX strategists said they intend to maintain medium-term optimism for the euro-dollar exchange rate, expecting the euro to jump to 1.10 in the next few months and 1.15 in 12 months. However, the Wall Street bank is reluctant to give a buy recommendation for now, mainly because the Ukraine war remains a tail risk to their expectations for a recovery in the euro.
2022-06-01
11862
Goldman Sachs FX strategists said they intend to maintain their medium-term optimism on the euro-dollar exchange rate, expecting it to jump to 1.10 in the coming months . However, the Wall Street bank is reluctant to give a buy recommendation for now, mainly because the Ukraine war remains a tail risk to their expectations for a recovery in the euro .
EUR/USD rebounded from a bottom of 1.0349 in early May, leading to speculation that the euro may have bottomed.
“Are we preparing for a sustained rally in the euro?” asked Zach Pandl, co-head of FX strategy at Goldman Sachs. “In some cases, that is a possibility.” For a meaningful rebound, the U.S. economy must outperform the euro. The region slowed down faster. "We see downside risks to U.S. economic growth," he said.
Goldman Sachs expects the ECB's imminent exit from negative interest rates to have a materially positive impact on fixed income flows, as the incentive to hold euro zone bonds improves . Goldman Sachs expects this flow to support the euro for some time .
The euro traded higher on May 23 after European Central Bank President Christine Lagarde cemented expectations for a July rate hike.
In an article on the ECB's website, Lagarde said: "I expect net buying under the APP to end at the beginning of the third quarter. This will allow us to raise rates at the July meeting, in line with our outlook. Sexual guidance." Following the remarks, the euro appreciated sharply against most major currencies, gaining 0.25 percentage points against the pound and 1.0% against the dollar.
Lagarde also said: "The conditions for monetary policy have changed significantly, with three shocks combined to push inflation to record highs."
Goldman Sachs strategized for four different potential scenarios for the Fed and the European Central Bank to change their current rate hike paths.
"The divergence between the two central banks could lift the 2-year spread by 100 basis points this year, which would imply a rise or fall of 8% for the euro against the dollar, all else being equal," Pandl said.
However, Goldman Sachs warned that it may be too early to fully support the euro given the ongoing conflict in Ukraine . Instead, they suggested selling the dollar against the yen as a way of expressing the view that the U.S. economy may be about to slow down sharply.
"The tail risk of the Russia-Ukraine war remains an important challenge," Pandl said. "While we do not expect a full-scale cessation of Russian gas exports, given the potentially severe impact on euro area growth, the likelihood of any possible outcome of this outcome is unanticipated. Any change in perception can affect the market.”
Goldman Sachs economists expect the euro zone economy to shrink by 2.2% in this scenario.
Nonetheless, Pandl said: "Given our view of the U.S. economy, the high dollar valuation, and the imminent end of negative cash rates in Europe, we stick to our constructive medium-term forecast for EUR/USD ."
Goldman Sachs sees EUR/USD at 1.15 in 12 months .
EUR/USD daily chart
GMT+8 June 1 10:56 EUR/USD at 1.0718
EUR/USD rebounded from a bottom of 1.0349 in early May, leading to speculation that the euro may have bottomed.
“Are we preparing for a sustained rally in the euro?” asked Zach Pandl, co-head of FX strategy at Goldman Sachs. “In some cases, that is a possibility.” For a meaningful rebound, the U.S. economy must outperform the euro. The region slowed down faster. "We see downside risks to U.S. economic growth," he said.
Goldman Sachs expects the ECB's imminent exit from negative interest rates to have a materially positive impact on fixed income flows, as the incentive to hold euro zone bonds improves . Goldman Sachs expects this flow to support the euro for some time .
The euro traded higher on May 23 after European Central Bank President Christine Lagarde cemented expectations for a July rate hike.
In an article on the ECB's website, Lagarde said: "I expect net buying under the APP to end at the beginning of the third quarter. This will allow us to raise rates at the July meeting, in line with our outlook. Sexual guidance." Following the remarks, the euro appreciated sharply against most major currencies, gaining 0.25 percentage points against the pound and 1.0% against the dollar.
Lagarde also said: "The conditions for monetary policy have changed significantly, with three shocks combined to push inflation to record highs."
Goldman Sachs strategized for four different potential scenarios for the Fed and the European Central Bank to change their current rate hike paths.
"The divergence between the two central banks could lift the 2-year spread by 100 basis points this year, which would imply a rise or fall of 8% for the euro against the dollar, all else being equal," Pandl said.
However, Goldman Sachs warned that it may be too early to fully support the euro given the ongoing conflict in Ukraine . Instead, they suggested selling the dollar against the yen as a way of expressing the view that the U.S. economy may be about to slow down sharply.
"The tail risk of the Russia-Ukraine war remains an important challenge," Pandl said. "While we do not expect a full-scale cessation of Russian gas exports, given the potentially severe impact on euro area growth, the likelihood of any possible outcome of this outcome is unanticipated. Any change in perception can affect the market.”
Goldman Sachs economists expect the euro zone economy to shrink by 2.2% in this scenario.
Nonetheless, Pandl said: "Given our view of the U.S. economy, the high dollar valuation, and the imminent end of negative cash rates in Europe, we stick to our constructive medium-term forecast for EUR/USD ."
Goldman Sachs sees EUR/USD at 1.15 in 12 months .
EUR/USD daily chart
GMT+8 June 1 10:56 EUR/USD at 1.0718
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