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EUR Surges Despite Goldman's Insistence The Bounce Is Over

EURUSD has been rising for the last week adding over 230 pips of the September 3rd Draghi lows. The last few minutes has seen that EUR strength extend 40-50 pips which must be disheartening for Goldman Sachs who just released a note explaining why EURUSD's bounce is over...

The Draghi Dip is done...


But this needs to stop according to Goldman..

While the bulk of the EUR/$ rise in recent weeks appeared to be linked to risk aversion dynamics related to uncertainty around China, next week’s FOMC is certainly an important event. Depending on the outcome, it is possible that rate differentials could move against EUR/$, in particular if the Fed signals more caution by revising down key forecasts in the SEP and holds off on 'lift-off', as our economists expect.


The implications for EUR/$ (and $/JPY for that matter) are not straightforward, however, since a bounce in risk appetite on such an outcome could lead to some unwinding of risk aversion flows we have seen recently. That dynamic would offset the rate differential move at least in part. As a result, our base case is that a bounce in EUR/$ (and Dollar weakness more broadly) will be limited, with perhaps bigger effects for the commodity currencies, where we could see a more sizeable rebound against USD.


Even as day-to-day and short-term risk-off correlations in the EUR persist, there should be no obstacle for renewed ECB easing to push down further on EUR/$. We expect any additional ECB easing, first by increasing the length of the sovereign bond purchase program in coming months, to help drive the EUR to 0.95 vs the USD over the next 12 months.

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