Goldman Sachs: A Smaller Cliff But A Low Ceiling

Goldman Sachs note that “the November flash PMIs added to a growing theme across Europe that things are nowhere near rosy, but also not as bad as feared at times this summer. We think this adds some important context to recent FX moves - it is not just about U.S. CPI and the Fed.”

• “At the same time, ongoing activity constraints in the Euro area that will almost inevitably stretch well into next year demonstrate the limitations on recent FX performance.”
• “Once positioning gets back to neutral, we are skeptical that the Euro can durably rally while the current account continues to deteriorate and activity remains in (modestly) contractionary territory.”
• “And into year-end, we think markets and the FOMC will start to push back on the substantial FCI easing over the last month, which we think is still inconsistent with Fed’s policy goals. That would be particularly effective on the Euro, where the policy differential can play an outsized role.”