Goldman Changes Euro Hypothesis as Forecasts Raised on ECB Miss

  • Forecasts $1.07, $1.05 in three, six months respectively
  • ECB isn't wholeheartedly pursuing reflation policies: Brooks

Goldman Sachs Group Inc. raised its forecasts for the euro after its call that the European Central Bank would send the shared currency tumbling as much as 3 percent with dovish easing policies crumbled last week.

The euro instead climbed more than 3 percent in the wake of the ECB’s Dec. 3 meeting, after President Mario Draghi’s package of measures underwhelmed some investors. The decision marked a shift in the central bank’s behavior for Goldman’s chief currency strategist Robin Brooks, who says he is losing faith that officials are "wholeheartedly" pursing reflationary policies.

Brooks forecasts the euro will weaken to $1.07, $1.05 and $1.00 in three, six and 12 months respectively. This compares to previous forecasts of $1.02, $1 and 95 cents. At end of 2017 the euro will be at 90 cents versus a previous forecast of 80 cents, he said.

“Although we are reluctant to do this, given our view of euro-zone fundamentals (a large output gap and low underlying inflation), we have to acknowledge the apparent disagreement on the Governing Council over the need for additional easing,” Brooks wrote in a note to clients. “There is no doubt in our minds that euro down will again become a theme over time, but regrettably that time is not now.”

The euro weakened 0.7 percent to $1.0810 as of 10:40 a.m. London time, extending a decline from Friday. On the day of the ECB meeting it jumped 3.1 percent, the biggest advance since 2009.

Goldman also raised forecasts for the euro against the pound and Swiss franc, to reflect new expectations that declines will be smaller. In six months the euro will be at 70 pence, compared with a previous forecast of 67 pence.

The ECB’s easing measures, which included a cut to the deposit rate and a six-month extension to the bond-buying program, didn’t meet expectations for aggressive stimulus, which were stoked by Draghi on Nov. 20 when he said policy makers “will do what we must to raise inflation as quickly as possible.” This sense of urgency was missing, Brooks said.

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