Goldman Sachs: Go Long On More Front-Loaded Appreciation

Goldman Sachs note that have tweaked their "EUR/USD forecasts to show more front-loaded appreciation, raising our 3-month target to $1.25 from $1.21, while holding our 12-month forecast at $1.28. We also issue a new long trade recommendation with a $1.25 target (and stop of $1.1750). Market expectations for European growth should improve over the next few months on the back of faster vaccinations and falling COVID-19 hospitalizations. Partly reflecting the improving economic trajectory, our equity strategy colleagues have upped their price target for the STOXX Europe 600 index, and they now expect a 10% total return over the next 12 months (compared to +6% expected returns for the S&P 500). Unhedged equity capital inflows can be an important driver of EUR/USD e.g., they were likely a key factor behind Euro appreciation in 2017. Separately, given the likely growth acceleration, our Europe Economics team expects the ECB to slow the pace of PEPP purchases after its June meeting. Meanwhile, recent stability in U.S. rates despite firm growth and inflation data may indicate that market pricing of the funds rate path has reached a local maximum. We think the combination of rising Euro Area growth expectations, solid equity returns for the region, initial normalization signals from the ECB, and more stable Fed pricing will extend the recent turn higher in the Euro. Unexpected hawkish signals from Fed officials - especially any indication that the June Summary of Economic Projections (SEP) will show a 2023 rate hike - should be considered the main risks to this trade, in our view."