Euro / Dollar Forecast Raised Again: Goldman Sachs

The resilience of the euro exchange rate complex continues to catch self-confessed ‘dollar bulls’ Goldman Sachs out and they have had to raise their EUR/USD forecasts higher as a result. Robin Brooks at Goldman Sachs writes:

Our big picture views are well known. We are Dollar bulls, since we think the 300 bps tightening cycle our US economists forecast (through 2019) maps into a 15 percent rise in the greenback.

We are very bearish the Yen, since we believe there is only one way forward for the BoJ in its pursuit of reflation: to continue surprising markets on the dovish side.

We think USD/JPY upside is actionable near-term, with 3-, 6- and 12-month forecasts of 115, 120 and 125, respectively.

We remain Euro bears and have kept our forecast for the trough in EUR/USD unchanged at 0.90 on a three-year horizon.

However, recent ECB meetings have disappointed us and we have scaled back our expectation for EUR/USD downside near-term, lifting our 12-month forecast from 0.95 to 1.05.

• Related: US Dollar Forecast to Rally: Goldman Sachs
• SEB and Goldman Sachs See Euro Exchange Rate's Strength as Fleeting
  
  

We updates our regression models for each of the G10 crosses we forecast.

These models map things like interest rate differentials, commodity prices and global risk appetite into FX and are one input into our forecasts.

In some cases, this exercise gives strong signals:

(i) it puts the Brexit risk premium for EUR/GBP around 5-8 big figures, so that EUR/GBP could move sharply lower in the event of a “remain”vote;

(ii) it suggests that USD/JPY is now too low relative to nominal rate differentials, a striking result given that nominal differentials have failed to keep pace with QQE and supportive of our call that USD/JPY upside is substantial;

and

(iii) the recovery in commodity prices since January is supportive of AUD/$, a signal we take note of, but at this point are inclined to fade.