Goldman Sachs maintains EUR/USD view despite French political turmoil

Goldman Sachs maintains a bullish outlook on the Euro despite recent French political instability, including the anticipated ouster of Prime Minister Bayrou, which briefly pressured the currency. The firm argues that historical patterns indicate limited contagion risk to the broader Eurozone economy, leaving growth forecasts unchanged and only marginally adjusting deficit targets. While acknowledging the Euro's recent weakening due to spread widening and long unwinding, Goldman asserts these risks are outweighed by US developments, anticipating continued Euro strengthening.

Analysis

Goldman Sachs is reiterating a bullish outlook on the Euro, positing that recent political instability in France represents a contained event rather than a systemic risk to the currency bloc. Despite prediction markets indicating a greater than 95% probability that French Prime Minister Michel Bayrou will be ousted by year-end following a September 8 confidence vote, Goldman's analysis suggests limited fallout. The firm's economists have maintained their growth forecasts and only marginally increased their French deficit target, arguing that historically, localized political risks only impact the Euro when they trigger broader contagion or tangible economic damage, neither of which is anticipated. The recent exaggerated weakening of the Euro, beyond what OAT-Bund spread widening would typically suggest, is attributed to the spread's origin in a core economy, amplification by political volatility, and the unwinding of long EUR/USD positions. Goldman Sachs concludes that these factors are secondary to persistent US Dollar weakness, and therefore expects the Euro to resume its strengthening trend.

Key Decisions for Investors

• Investors with a bullish view on the Euro could interpret the recent politically-driven weakness as a potential buying opportunity, consistent with Goldman's view that the negative drivers are temporary and localized.
• Monitor the OAT-Bund spread closely, as a stabilization or narrowing of this spread would be a key indicator that the market is absorbing the French political risk, potentially signaling a floor for the recent EUR sell-off.
• While the base case presented is bullish for the Euro, it is prudent to watch for any signs of political contagion to other Eurozone members or a material deterioration in French fiscal outlooks, as these are the primary risks that would invalidate the thesis.