EUR/USD Will Fall 'A Lot Further' Because Of This
eFXnews | Jul 13, 2015 12:46PM ET
"One of our main foreign exchange forecasts – that EUR/$ will fall a lot further – hinges critically on the view that inflation in the Euro zone will be slow to rise. Our thinking is that structural reforms on the Euro periphery are deflationary, since they aim to restore competitiveness by cutting wage and price levels. As a result, periphery low inflation (or even deflation) is partly structural, i.e. slower to respond to expansionary monetary policy than otherwise.
We take a closer look at inflation in the Euro zone, in particular whether there is a structural element to dis-inflation on the periphery. We exploit the cross section of countries in the Euro zone to examine whether the Phillips curve – the link between inflation and slack – has shifted down on the periphery due to structural reforms, in contrast to core countries like Germany, which are not under pressure to reform product and labor markets.
We find some evidence that periphery Phillips curves have shifted down, in particular in Greece, Portugal and Spain, while they look relatively stable in core countries. The periphery shift down has spilled over to the Euro zone as a whole, with recent inflation readings lower than predicted by the historical Phillips curve relationship. Obviously, these results are subject to caveats, notably that slack on the periphery is difficult to measure, especially in the presence of structural reforms. That said, we see our results as consistent with our view that low inflation in the Euro zone is partly structural, which supports our view that ECB QE will last at least through September next year, which in turn supports our EUR/$ downside view."
Robin Brooks, George Cole, Michael Cahill - Goldman Sachs (NYSE:GS)
**GS sees EUR/USD trading at 1.02, 1.00, and 0.95 in 3, 6, and 12-month respectively.
/h2
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.