While the UK is focused on the latest Brexit plan, the GBP/USD could react sharply to the FOMC state...
EUR/USD: Ignore the Noise, Stick to Fundamentals
06/22/2015 9:00 am EST
Despite the fact that the Greek crisis is certainly moving markets, Yohay Elam, of ForexCrunch.com, points out that the forecast from the team at Goldman Sachs suggests traders follow the fundamentals and ignore the noise, which implies a strong movement downwards.
The Greek crisis—with all its ups and downs—is certainly moving markets, as we have seen with the recent spikes.
Nevertheless, the team at Goldman Sachs (GS) says we should follow the fundamentals and not the noise and this implies a strong movement downwards.
Here is their view, courtesy of eFXnews:
Following Wednesday’s FOMC meeting, Goldman Sachs US Economics team changed its central expectation on the timing of the first hike, which it now expects in December. From there, they expect the FOMC to raise rates by 100bp per annum, with the Fed Funds target range reaching 1.25-1.50% at the end of 2016 and 2.25-2.50% at the end of 2017 (roughly half way between the dots and the forwards).
“Strengthening economic data and rising asset prices will, in our view, lead the market to revise its pricing for the tightening cycle towards the FOMC median profile, i.e., re-building some risk premium,” GS argues.
“Our EUR/$ down view hangs on fundamentals. Here, our view is that the growth crisis in the EuroZone means that inflation will be slower to pick up than during a normal cycle, in line with projections from our European team that show HICP inflation reverting back to target only slowly. The reason for this is that structural reforms on the periphery (in labor and product markets) may hold down inflation for a given level of the output gap, which could reflect the Phillips curve shifting down,” GS argues.
“Exhibit 4 shows some evidence for this, where the horizontal axis gives the unemployment gap—we use an eight year moving average to proxy for structural unemployment, which puts that around 10% currently, in line with our European team estimates—and core HICP inflation is on the vertical axis. Core inflation since early 2014 has shifted down for a given unemployment gap,” GS clarifies.
This picture is most pronounced for Spain (Exhibit 5), where labor market reforms are arguably most advanced. There are obvious important caveats here, notably that the EuroZone is not a unified labor market. That said, this analysis points to low inflation in the EuroZone remaining a formidable challenge, which gives us confidence in our longer-term euro down view,” GS adds.
GS maintains its EUR/USD forecasts at 0.95 in 12 months and 0.80 by end of 2017.
By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com
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