EUR/USD: Goldman Sachs thinks pair will fall to 0.95 within 1 year due to QE by ECB

In this note, Goldman Sachs explains why the EUR/USD has not evolved recently in parallel with European rates, while stressing its anticipation of further monetary easing by the ECB and how it will impact the cross in the coming month:

"We analysed the decline of the euro, in particular to understand its relationship with the easing of the ECB. We found that there is a strong link between market expectations in terms of the ECB's trade balance and the euro's price level. The recent decline of the euro is related to these expectations.

But it's not just the euro that declined, the JPY declined even further, especially against the dollar, and this is also due to expectations of monetary tightening by the Fed.

But if we look beyond short-term movements, what drives the euro? The clearest candidate is monetary divergence between the Fed and the ECB.

Our ECB QE expansion expectations will potentially bring the euro down but the FED still represents significant risk. In the event of a delay, the end of QE re-investments by the Fed (to maintain the state of the balance sheet) could be postponed to mid-2017.

But our main scenario is that monetary divergence between the Fed and the ECB will continue and that the EUR/USD will continue to decline, heading for 0.95 within a year." says Goldman Sachs.