Goldman: Lower For Longer

Goldman Sachs note that “the next 6 months seem likely to be challenging for the Euro area, which is likely to keep EUR/USD close to parity. Our economists now expect the Euro area to be in recession in the second half of this year; spot data are already slowing materially and further production disruptions are likely. Most critically, with natural gas supplies from Russia well below normal, it will require some form of demand destruction - through some combination of higher prices and government policies - to make it through the winter, even if storage tanks are full.”

• “We think the recent move lower in EUR/USD reflects this shifting growth outlook, and is likely to extend somewhat further given the continued downside risks to activity from more severe gas disruptions and the scope for a much deeper downturn. Based on our metrics, the recent recovery in EUR/USD is not entirely justified by the news flow and the market still has some work to do to price our new baseline outlook, as well as put some weight on more severe outcomes (we think the 10:1 payout on 4-month EUR/USD $0.95 puts looks attractive as a hedge). And even if the near-term picture improves a bit, we think recent disruptions will be enough to command an ongoing discount in EUR/USD. Our commodity strategists have highlighted that weather-related uncertainty will be particularly elevated in the first half of winter.”
• “As a result, we are revising down our 3- and 6-month EUR/USD forecast to $0.99 and $1.02 (from $1.05 and $1.10 previously) and making similar adjustments to EUR/GBP (to GBP0.83 and GBP0.84, from GBP0.88 and GBP0.90 previously). We think a more substantial policy pivot from the FOMC presents the most significant upside risk to this view, but strong U.S. wage and inflation data should mitigate this to some extent. On the contrary, we do not think that swifter ECB rate hikes would materially help the currency from here. However, we maintain our standing 12-month forecast at $1.15 given the near-term nature of the growth risks in Europe, and we still believe that moving out of negative rates will prove to be a long-term positive for the Euro.”