Goldman: Changing The Mix, Raising Our EUR/USD Forecast

Goldman Sachs note that last week’s “FOMC decision helped crystallise the challenging mix of factors pushing on the USD. In perhaps the most critical change for the USD framework, Chair Powell noted that tighter lending standards can substitute for rate hikes. But, while that may be true for the broader economy, the imprint of these two tightening channels is very different across asset markets.”

• “Particularly for FX, tightening through credit has the opposite effect as raising the risk-free rate, as we explored by drawing on lessons from the ECB’s experience over the last decade. This demonstrates why the USD has broadly underperformed in recent weeks as the market has migrated towards pricing an idiosyncratic US shock.”
• “We are revising up our 3- and 6-month EUR/USD forecasts to $1.05 (from $1.02) to account for the recent deterioration in the U.S. growth outlook and less favourable tightening mix for the USD. This forecast still implies some USD appreciation from spot over the next three months, largely because we think the market is currently pricing too much US-RoW divergence over that period. And, we are maintaining our 12-month EUR/USD forecast at $1.10; we expect that still-limited economic slack and rising recession risks cut against more meaningful USD downside.”