Synopsis:

Goldman Sachs raises its EUR/USD forecasts slightly but maintains a bearish outlook, citing lingering US tariff risks and limited fiscal support in the Eurozone. While the Euro has held up better than expected, Goldman argues that the market has overly relaxed the tariff premium, making the current EUR/USD equilibrium unstable.

Key Points:

1️⃣ Revised EUR/USD Forecasts 📊

• 3-month target: 1.02 (previously 1.00)
• 6-month target: 1.01 (previously 0.97)
• 12-month target: 0.99 (previously 0.97)

2️⃣ Tariff Risks Still Underpriced 🚨

• The Euro’s relative stability is partly due to US policy shifts, but the full impact of tariffs has yet to be felt.
• Further US tariffs (especially on European autos) and trade uncertainty could weigh on European growth and drag EUR/USD lower.

3️⃣ Market Underpricing USD Upside Risks 💵

• Options markets only price a 20% chance of EUR/USD at 0.99 in 12 months, which Goldman sees as too low.
• The FX market may be ignoring the extent to which US policy shifts and economic divergence can strengthen the USD.

4️⃣ Limited Fiscal Support in the Eurozone 🇪🇺

• Unlike the US, where fiscal expansion continues, the Eurozone has weaker fiscal tailwinds, making the economic divergence more pronounced.
• This leaves the Euro more vulnerable to external shocks, especially tariffs and trade policy uncertainty.

Conclusion:

Goldman Sachs adjusts its EUR/USD forecasts slightly higher but maintains a bearish bias, warning that tariff risks and US economic outperformance remain key headwinds. The market may be too complacent in underpricing the potential for USD strength and Euro downside, making the current EUR/USD equilibrium fragile.