EUR/USD: Goldman Sachs remains bearish, lists 3 and 6-month targets

Goldman Sachs explains why the decline of the euro has stopped and why the underlying downward trend will resume:

1- For us, the decrease of the EUR/USD from 1.40 a year ago to current levels is explained by the change in monetary policy by the ECB. A change that was forced by declining inflation. In short, it seems that the fall of the euro is related to the fact that the ECB has become detached from the influence of the Bundesbank.

2- But the perception of the markets regarding this is fragile. In May, core HICP inflation rose to 0.9 compared with 0.6% in April, which has shaken the belief that the ECB will indeed continue QE until September 2016.

So, why should the downtrend resume?

3- We believe that what is now changing things is the downward trend in oil prices. In this context, it will be difficult for the ECB to reduce inflation to 1.5 by next year, which will leave the Doves in the driver's seat. We estimate that a 10% decrease in oil prices equivalent to a decrease of 20 basis points in inflation after T4.

4- We therefore expect that the fundamentals will realign with the market's conviction.

GS remains bearish on the EUR/USD, targeting 1.02 within 3 months and parity by 6 months.