Goldman Sachs on ECB and EUR

Goldman Sachs on ECB and EUR

Summary:

Goldman Sachs sees no changes in the ECB’s policy
EURUSD remains overvalued against the bond market

The euro has enjoyed recently a more hawkish stance presented by Draghi at his appearance in Sintra, Portugal. As a result, the EURUSD has managed to achieve the highest level since mid-2015. However, his remarks were questioned by the ECB as a whole, what it saw a continuation of the euro rally dubious. Either way, a recent wave of braver steps towards less expansionary monetary policy which have been taken by major central banks have reinforced hopes for higher borrowing costs.

Meanwhile, Goldman Sachs analysts doubt in any shifts in the ECB’s monetary policy this year. They interpret Draghi’s comments in the context of their own forecast (of low domestic inflationary pressures and no further acceleration in economic activity). On their economic base case, Draghi’s comments do not suggest a need for a hawkish shift in policy.

Moreover, the bank does not think that the ECB will be too concerned about recent price action in longer-dated Bund yields as higher yields may reflect an expectation of higher future growth. Analysts see the ECB as having greater concern for an appreciating EUR vis-a-vis the USD, especially in the context of a market which is increasingly doubting the Fed’s scope to raise rates further.

Put the all above-mentioned together the bank decides to leave its forecast of the ECB’s policy unchanged. This includes that they expect a change neither in policy rates nor asset purchases for the remainder of 2017. Looking forward, GS assumes that the ECB to taper its asset purchases gradually during 2018 and a possible rate hike not before 2019.

link do file download link

The EURUSD is retreating from its year-to-date high and eyeing 1.1280 as a potential target for bears. Source: xStation5

Having looked at the EURUSD one could assume that the pair might maintain its short-term downward bias. After a breakout of a 1.1370 the pair could achieve 1.1280 or move even lower towards an area placed at a round level 1.11.
It’s worth adding that recent better than expected readings from the US economy have pushed dollar market rates higher what, in turn, has widened a divergence between the pair and the bond market. Weighing the spread of 10y yield in the US and Germany against the EURUSD one could expect the exchange rate should slide toward 1.11 to be fairly valued.

According to the bond market the EURUSD could be at around 1.11. Source: Bloomberg

About Author

Our research team will provide all technical and fundamental news as well as all inside information coming from London's City desks to help investors trade fx and stock markets. Be sure that you already follow our twitter account @XMarketsuk in order to be up to date with all latest analysis, news and inside information.

Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. X Markets and XSpot. do not take into account your personal investment objectives or financial situation. X Markets and XSpot. make no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any member of X Markets Websites’ team, a third party or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of X Markets and XSpot. This communication must not be reproduced or further distributed without prior permission.

Risk Warning: Forex (FX) and Contracts for Difference (’CFDs’) are complex financial products that are traded on margin. Trading FX and CFDs carries a high level of risk since leverage can work both to your advantage and disadvantage. As a result, FX and CFDs may not be suitable for all investors because you may lose all your invested capital. You should not risk more than you are prepared to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Past performance of FX and CFDs is not a reliable indicator of future results. Most FX and CFDs have no set maturity date. Hence, a CFD position matures on the date you choose to close an existing open position. Seek independent advice.