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Euro Forecasts against Pound Sterling and Dollar Raised at Goldman Sachs

- USD dominance of last decade to fade
- But no big Dollar crash likely
- Higher Euro expected
- GBP/EUR forecasts lowered, but GBP/USD forecasts raised

Euro forecast vs Pound and Dollar

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Foreign exchange analysts at Goldman Sachs have raised their forecasts for the Euro against the British Pound and U.S. Dollar, saying the coronacrisis has reshuffled the economic outlook and they now hold "more confidence in sustained Euro appreciation".

Where the past decade has seen the U.S. economy outperform to the benefit of the Dollar, the Eurozone could find itself better placed over coming months thanks to the labour market, medical and cultural texture of European countries that will deliver a relative advantage in a crisis caused by a medical and social shock.

The U.S. economy has outperformed that of the Eurozone for some years now, a situation reflected in the Euro-Dollar exchange rate which trades towards the lower end of historical ranges.

"But the world is now dealing with a new crisis, which is revealing certain positives about the European system — e.g. the capacity of its health care infrastructure, the stickiness of firm/employer relationships, and arguably aspects of its politics and media—and revealing related negatives about the United States," says Zach Pandl, Senior Economist at Goldman Sachs.

According to economists at Swiss investment bank Julius Baer, daily activity indictors reveal an earlier and more serve drop in economic activity in the eurozone than in the U.S., Canada or Japan in March, reflecting largely the more stringent virus containment measures. The reward is a more pronounced recovery since May, after restrictions started to be eased.

"Lower new infection rates in Europe and a swifter recovery of activity are valid reasons to scale back some pessimism regarding the eurozone growth outlook," says David Kohl, Economist at Julius Baer. "In dealing with the corona pandemic, Europe seems to be doing increasingly better, while the number of new infections remains high in the US. Economic indicators mirror these developments."

Daily data suggests that activity in the eurozone countries has reached 92% of the pre-crisis level, while the US stagnates at a level of around 67%. "The swift recovery in the eurozone comes as a surprise and challenges our long-held view of US growth superiority during the corona crisis, given the more pronounced government support," says Kohl.

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This view is reflected by other economists with Jen Licis, Economic Analyst at Wells Fargo saying: "The first half of the year has been tough for the Eurozone economy as COVID-19 intensified and governments enforced strict lockdown and social distancing measures. However, in recent weeks we have become more constructive on the prospects for the Eurozone as some economic indicators have been more encouraging, signaling that the worst may be over for the economy."

"We have become more constructive on the Eurozone economy, under the assumption that the COVID-19 pandemic remains under control and data continue to improve."

Make no mistake, there is no Dollar crash predicted by Goldman Sachs, rather there is likely to be rebalancing of perceptions amongst the global investor community away from what could be described as having been the U.S.-centric approach of the past decade.

"Many of the world’s best companies are located in the US, bond yields are still marginally higher than in the Euro Area, and the country’s economy has proven resilient through many shocks over a long period of time. For these reasons the Dollar is very unlikely to “crash”, and we could only envision the Euro displacing aspects of the Dollar’s global role over long periods of time," says Pandl.

Goldman Sachs economists say however European GDP could outperform, and Europe’s "lacklustre returns recently may have been a byproduct of the particular macroeconomic environment that followed the 2008-09 recession".

Investors are being tipped to "take a more balanced approach to the international opportunity set, resulting in a reduction of long-standing USD overweights and portfolio inflows into other major markets, including the Euro Area".

Goldman Sachs have raised their 12 month forecast for EUR/USD to 1.25 from 1.17, but "uncertainty over the coronavirus and the cyclical outlook should support the Dollar’s safe haven appeal, so we expect Euro appreciation to remain relatively gradual for now," says Pandl.

The lift to the Euro-Dollar forecast has implications for other Euro exchange rates, notably the Pound-to-Euro exchange rate which has seen targets lowered from 1.1363 to 1.11 on three and six month horizons while the 12 month forecast is lowered to 1.15 from 1.1628.

However, a broader Dollar underperformance is reflected in a slightly higher Pound-Dollar forecast where the exchange rate is seen at 1.44 in 12 months, up from 1.44 previously.