Goldman lowers euro/dollar forecast after Draghi's remarks
Goldman says ECB reaction function has not changed
Goldman sees euro/dollar at 0.95 in 12 months' time, versus 1.0 before
Goldman emphasises idyosincratic component of euro area inflation
European Central Bank president Mario Draghi is still able to push through his agenda and will not allow himself to be dissuaded from pursuing further policy stimulus, one of the world’s most influential brokers said.
In an about-face, analysts at Goldman Sachs said they were wrong to believe the ECB’s ‘reaction-function’ had changed at its 3 December policy meeting; more specifically, Draghi’s ability to push through necessary easing.
The broker therefore reverted to its previous call for the euro/dollar to weaken from 1.00 to 0.95 in 12 months’ time.
In a research note sent to clients on 21 January, immediately following the ECB’s rate decision, Goldman called attention to the fact that inflation dynamics in the Eurozone have a “heavy idiosyncratic, or euro-specific” component – real GDP has yet to reclaim its 2008 peak.
Goldman also said China worries were “exaggerated”
Instead of focusing on global inflation trends, investors should keep in mind that in order to meet the ECB’s projection for a “modest” rise of 1.3% in ‘core’ HICP inflation, month-on-month core HICP would need to double versus its pace last year.
On the basis of past instances of a cut to the deposit rate, on 4 September 2014 and 22 October 2015, a 10 basis point reduction was known to lead to two big figure downside in euro/dollar, Goldman said.
A recovery in risk-appetite - Goldman also said China worries were “exaggerated” - can lead to another 2-3 big figures, it added.
The broker retained an end-2017 forecast for euro/dollar of 0.90, but added that it saw downside risks to that.