Goldman Sachs: EUR Strength To Keep Front-End Rich

Goldman Sachs note that "various ECB speakers brought attention to EUR strength last week, starting with familiar language from chief economist Phillip Lane that while the EUR is not a target, it does matter. Our economists estimate that EUR appreciation will only have a limited impact on growth and inflation, but given the weak starting point for inflation it is not surprising that any further headwinds will be watched. With limited tools to counteract currency appreciation, focus will remain on the front-end of the EUR curve, which has rallied in recent sessions. End-2021 pricing is now around 10bp, with a little over 5bp by March. We think the risk reward to receive is most attractive in the first six months of ECB meetings, given the potential for ongoing recovery and potential vaccine developments to weigh on duration and thus pricing further out the curve. Our base case is that the ECB will not cut rates, but at this week's meeting, we will watch for any mention of 'unwarranted tightening of financial conditions' or any discussion of the potential to raise the tiering multiple, both of which would be clues of the rising possibility of a rate cut."