Goldman Sachs: Sharp Decline On Policy Divergence & Domestic Growth Risks

Goldman Sachs note that "the EUR has dropped sharply over the last month, both against the USD as well as other major crosses. Its weakness against USD partly reflects shifting expectations about Fed policy, following higher-than-expected inflation in the October CPI report. To some degree these risks now appear priced in: comments from Fed Governor Waller and Vice Chair Clarida on Friday that the FOMC could speed up the pace of QE tapering had a limited effect on EUR/USD. Europe-specific factors likely explain the single currency's weakness against the broader range of crosses. In particular, surging COVID cases have resulted in a new lockdown in Austria and the prospect of activity curbs in other continental economies. For the most part the message from ECB officials has also been steadfastly dovish. While our economists expect a more limited expansion of APP at the December ECB meeting - and recent communication appears consistent with that outcome - a pullback in bond buying can be FX-negative in a Euro Area context due to the effect on sovereign spreads."

• "Unless this week's flash PMIs surprise significantly to the upside we would expect markets to remain focused on downside risks to Euro Area activity. We are therefore revising our 3-month and 6-month EUR/USD forecasts to $1.14 and $1.16 respectively (from $1.16 and $1.18 previously). We think EUR/USD can fall below current spot over a shorter horizon (~1 month), but we would expect a rebound thereafter under our baseline forecasts for growth and policy on both sides of the Atlantic. Our preferred trade in G10 FX remains short AUD/CAD, and we continue to recommend EUR as a funder against longs in regional satellite."