Goldman Sachs: The Euro Outlook Is Circular

Goldman Sachs write “we have argued that Euro upside is capped because commodity constraints will limit Europe’s ability to benefit from stronger foreign demand and that the ECB would struggle to support the Euro because aggressive rate hikes into a recession risk reigniting sovereign credit concerns. However, after a mild winter, those commodity constraints now look significantly less binding.”

• “As a result, our economists no longer expect a Euro area recession this year. Importantly, this puts the economy (and currency) in a better position to absorb a more hawkish ECB outlook.”
• “In short, commodities are still driving the Euro area outlook, but that paints a much brighter picture now that we are mostly looking back on the “winter that wasn’t.””
• “We continue to recommend (indirectly) bullish Euro positions via short GBP/CHF, and could sympathize with the more direct expression of long EUR/GBP as risks recede.”
• “At current levels the EUR is already pricing a lot of optimism, and further gains will require the type of sustained capital inflows that typically coincide with more significant FX outperformance. Those have not yet materialised, presumably because investors remain wary of medium-term capital return prospects given ongoing disruptions from the war and financial fragmentation risks.”