The following are the key points constituting GS' argument along with its latest forecasts for EUR/USD.
1- "Tactically, we think now is a good time to position for Dollar strength. That
is because some of the progress the Fed made last year towards data
dependence has been undone since the March FOMC, when Chair Yellen
memorably said that dropping "patient" does not translate to
impatience," GS advises.
2- "Since then, our estimate for the sensitivity of
two-year yields to US data surprises has fallen back to near "calendar
guidance" level, meaning that - even though it de jure abandoned forward
guidance in March - de facto the market sees the Fed as having gone
into reverse. This
matters for the Dollar because the dilution of forward guidance last
year was an important Dollar positive in the weeks following the
September and December meetings (Exhibit 4, pink arrows)," GS
clarifies.
3- "Regardless of when 'lift-off' happens, we
think this means that more of a risk premium needs to go into front-end
US rates, which is Dollar positive. Indeed, a higher risk premium may be
the main take-away from this week's dueling Fed speakers," GS argues.
4- "Dollar upside is also actionable because
falling oil prices are most obviously a threat to those places - the
Euro area and Japan - that are battling deflation...We think the market is - falsely - dismissing the threat that falling oil prices pose for the deflation fight in the Euro area," GS adds.
5- "Much as last summer, it will be key to see if
falling oil prices spill over into inflation expectations, where the
fall so far has been relatively muted. In Japan, it would take a
herculean rebound in sequential core inflation to reach the BoJ forecast
of 0.7% for FY2015, even if a new inflation measure from the BoJ (that
excludes energy and fresh foods but includes processed foods) shows a
better inflation trend. In both Japan and the Euro area, the odds of additional stimulus may be rising, a further reason to be long Dollars," GS advises.
GS maintains its EUR/USD targets at 1.02 in 3-month and at 1.00 in 6-month.
