With the Euro continuing to drop in value against the US dollar, the two currencies may reach parity for the first time in over a decade. Currently sitting around 1.06 to the dollar, the Euro has fallen consistently over the last year and made significant drops over the last couple of weeks. Goldman Sachs is the latest big name to forecast parity between the two biggest currencies in the world, with an updated forecast for the Euro to reach 0.95 in as little as 12 months.
Anticipating changes in US monetary policy and portfolio outflows from Euro area residents, Robin Brooks from Goldman Sachs thinks the Euro will keep dropping over the next few months. Even greater falls have been forecast over the medium to long term, with the downward extent of predictions stunning both analysts and traders around the world.
“We … update our forecast to 1.02, 1.00 and 0.95 in 3, 6 and 12 months (from 1.12, 1.10 and 1.08 previously), as well as 0.85 and 0.80 at end 2016 and end 2017 (from 1.00 and 0.90), respectively. We therefore expect more downside in the near term, with the expected removal of “patient” at this week’s FOMC a key catalyst. In the longer term, we continue to believe that EUR/USD will significantly undershoot our GSDEER measure of fair value (around 1.20), reflecting diverging growth and monetary policy outlooks.”
The US dollar rally and Euro fall continue to dominate conversation in financial markets, with the strength of the dollar influencing global currencies along with S&P 500 earnings growth and stock market performance. After breaking technical support levels around 1.19 late last year and 1.08 in early March, the Euro has continued to slide at a rate much faster than most people expected.
According to Goldman Sachs equity strategist David Kostin, “Investors are concerned about the impact of the strength of the USD on S&P 500 earnings growth and stock market performance. Historical returns and our earnings model indicate that direct impacts of a stronger dollar on index-level equity performance are small, but indirect impacts could be larger should USD appreciation weigh more heavily on economic growth, particularly in the US. We recommend US stocks with high domestic sales.”
According to a related report by Societe Generale’s Cross Asset Research, most traders think the Euro will keep falling against the US dollar. Almost half of 188 respondents surveyed in the recent report were targeting parity levels for EUR/USD within 12 months, with almost 20 percent targeting levels below parity and a similar number targeting 1.05. While there was still a significant number of people expecting the Euro to rise to 1.10 and above, consensus for the Euro in 2015 is definitely bearish.