EURUSD could drop to 0.9400 over three months on US-EU policy divergence – Goldman Sachs

Analysts at Goldman Sachs, in their latest client note, revised the EURUSD price forecast lower for the next three months, in the face of divergent US and Euro area monetary policy outlooks.

Key quotes

“The Euro area current account has deteriorated significantly in recent months. Digging into the details, higher energy prices account for about two-thirds of the decline in the trade balance, while the higher cost of manufactured goods from Asia is responsible for most of the rest.”

“If this is sustained, it could have a material impact on the currency, both on a cyclical basis and a more structurally.”

“The ECB has flagged that looming recession risks could lead to a smaller hiking cycle, and recent forward-looking data paint a bleak picture, particularly on the manufacturing side.”

“If energy costs prove to be persistently higher and more volatile, it would require a weaker currency to compensate.”

“As a result, if the current account stays around current levels, our estimate of Euro fair value would fall substantially. We therefore expect that recent EUR depreciation has further room to run, and have downgraded our 3-month forecast for EUR/USD from $0.97 to $0.94 (while maintaining our 6-and 12-month forecasts at $0.97 and $1.05), mostly due to the diverging cyclical and policy outlook between the US and Euro area.”