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.
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