Goldman Sachs Revises EUR/USD Forecasts Lower

The US bank nudges down its EUR/USD forecasts on policy divergences, see below for more details.

Goldman Sachs: "We agree with ECB President Lagarde's recent assessment that policymakers in the US and Euro area are facing a different set of circumstances across a number of factors, including the inflation composition and fiscal support, which should allow for somewhat divergent policy choices over the next few months. And, while it is a notable change that there are signs of stabilization in Euro area growth, this should not be extrapolated too far in terms of the relative outlook. We and consensus continue to upgrade the US growth outlook, while in the Euro area “flat is the new up”--recent upside surprises have only been enough to keep consensus expectations roughly unchanged, rather than the continual downgrades that were a feature of 2023's disappointing recovery. As a result, the growth differential continues to stay wide and could widen further if consensus moves closer to our more robust US outlook. Meanwhile, the large energy component to EA inflation should allow for a slightly faster return to the ECB's target over the next few months, keeping the policy outlook on track. And ongoing energy uncertainty and potential trade tensions should limit the prospect for large portfolio inflows of the sort that boosted the Euro in 2017 or 2021. However, it should be noted that the move towards better balance should also limit the extent of currency depreciation--there are important differences from the divergent days of 2014, especially the starting level for the currency. Taken together, we are revising our EUR/USD forecasts to 1.05, 1.05 and 1.08 in 3, 6 and 12 months (from 1.08, 1.10 and 1.12 previously). Downside risks to the Euro continue to feature prominently in our trade recommendations."