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EUR/USD to 0.95 in 12 months – Goldman Sachs

The euro begins the  new week with an upwards move, bouncing from the deep lows. But is this another dead cat bounce?

The team at Goldman Sachs has revised EUR/USD lower (after doing it less than a month ago) and they explain it with charts:

Here is their view, courtesy of eFXnews:

Goldman Sachs cuts its EUR/USD forecasts for the second time in less than a month. The following is GS’ rationale behind this revision along with its new EUR/USD forecasts.

FOMC March Meeting:

The September and December FOMC meetings, which both weakened forward guidance, saw the Dollar rally by between 2% and 3% in subsequent weeks. We see this week’s FOMC meeting, which should drop the word “patient”, as another step in that process. Indeed, given that US monetary policy may revert to full data dependence, something that Chair Yellen alluded to in her Humphrey-Hawkins testimony with “meeting-by-meeting decision making”, we think past price action is likely a lower bound. The normalization of US monetary policy is a powerful – if underappreciated – force for EUR/$ lower looking ahead,” GS argues.

Beyond the Fed and the Dollar, GS thinks there is also genuine Euro weakness at play not only due of the start of sovereign bond purchases by the ECB, but also with more fundamental forces at work:

Portfolio Outflows:

There is growing focus on the scope for portfolio outflows by Euro area residents to pull EUR/$ lower. Data through December show net outflows on a trend basis for the first time in many years, something that we think is likely to gain steam as the implications of ECB QE become more fully understood,” GS clarifies.

Net outflows from the euro zone are picking up EURUSD price action has benefited the top trade

No Bottom for EUR/USD Yet:

The market’s initial focus on a cyclical bounce in the Euro area seemed to go hand-in-hand with people calling the bottom in EUR/$, and even a rebound. We differ in two important respects. First, any material rebound should see consumption recover somewhat in the Euro area periphery, which could be a drag on the Euro area current account. As such, much like the Dollar until mid-2014, we expect the Euro to weaken on signs of recovery. Second, and more fundamentally, we continue to worry about the large amount of slack in the Euro periphery, whereby even above-consensus growth in the near term (which our European team expects) will hardly suffice to close output gaps and bring down unemployment levels in a meaningful way,” GS adds.

New Forecasts:

GS cuts EUR/USD forecasts to 1.02, 1.00 and 0.95 in 3, 6 and 12 months.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.