Synopsis:

Goldman Sachs remains confident that EUR/USD will decline to parity within three months as optimism surrounding a peace deal fades and policy uncertainty weighs on capital flows. The Euro is expected to underperform relative to rate differentials, especially as higher US tariffs and potential shifts in CNY currency management drive broader FX volatility.

Key Points:

1. Peace Deal Optimism May Fade:

   • The recent EUR/USD rally aligns with rising hopes for a peace deal improving the Eurozone's terms of trade.
   • Near-term disappointment is possible if peace talks stall or fail to meet expectations.

2. Policy Uncertainty to Weigh on Capital Flows:

   • Even if tariff implementation is delayed, the uncertainty surrounding US trade policies will likely keep investors cautious.
   • This should limit EUR upside and reinforce capital outflows from the Eurozone.

3. EUR/USD Underperformance Driven by US Tariffs & CNY Moves:

   • The Euro is expected to lag behind rate differentials, particularly as higher US tariffs weigh on sentiment.
   • Potential shifts in CNY currency management could increase FX volatility, indirectly pressuring the Euro.

Conclusion:

Goldman Sachs remains confident in its EUR/USD parity call within three months, driven by waning peace deal optimism, capital outflows due to policy uncertainty, and the impact of US tariffs and CNY shifts.