While EUR/USD managed to bottom out after the mixed Non-Farm Payrolls report, this is not necessarily a long lasting bounce.
Euro/dollar parity is no longer ruled out in the longer term, and the bank provides targets for the shorter term as well as explanations for the downgrade of forecasts:
Here is their view, courtesy of eFXnews:
The last time Goldman Sachs made a meaningful downward revision to its EUR/USD forecast was back in August, just after ECB President Draghi’s speech at Jackson Hole. At the time, GS’ message was that EUR/USD has begun a protracted weakening trend, reflecting cyclical underperformance vis-à-vis the US and a more activist ECB, which would take the single currency to parity versus the Dollar by 2017.
Today GS revised down its EUR/USD forecasts further: Here are GS’ rationale behind this revision along with its new forecasts.
Growth & Competitiveness Crisis Continues Unabated:
“The sovereign debt crisis in Europe arguably ended mid-2012 with President Draghi’s important “whatever it takes” speech and the subsequent creation of the OMT program. However, a growth and competitiveness crisis continues unabated, and this forms the backbone of our EUR/$ lower vi
ew. This sets the stage for protracted cyclical underperformance vis-à-vis the US (Exhibit 3) and deflation / disinflation, which our persistence-weighting makes out to be the most severe in the G10 (Exhibit 4), even before recent sharp falls in oil prices,” GS argues.
EUR/USD Undershoot ‘Fair Value’:
“As a result, we see the recent slide in the single currency as part of a broad trend, which will see EUR/$ undershoot ‘fair value’ (around 1.20, based on our GSDEER model) on the weak side for a protracted period. In particular, we think that if ECB policies manage to convincingly raise inflation expectations, EUR/$ may fall more than implied by nominal rate differentials,” GS adds.
New Forecasts:
“We are revising down our forecast further today, to 1.14, 1.11 and 1.08 in 3, 6 and 12 months (from 1.23, 1.20 and 1.15 before). We are also revising down our longer-term forecasts, bringing the end-2016 forecast to 1.00 (from 1.05) and that for end-2017 to 0.90 (from 1.00),” GS projects.
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