Goldman Sachs Slashes Pound-to-Euro Forecast

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Goldman Sachs raises its forecast for the Euro across the board.

The Wall Street investment bank says the lift to its Euro forecast is due to Germany's decision to boost expenditure, which is viewed as a significant moment for the entire European economy.

"Our European economists responded to the unprecedented German spending plans by upgrading their Euro area growth forecasts despite the looming tariff threats. As a result, we are also revising our FX forecasts," says a research note from Goldman Sachs.

The lift to the bank's Euro-to-Dollar forecast is notable, as it previously predicted a fall to below parity. The Pound's outlook against the Dollar is left unchanged, which means the Pound-to-Euro exchange rate (GBP/EUR) forecast is automatically lowered.

Previously, GBP/EUR was seen peaking at 1.25. The new targets are available to view in this exclusive download, which was updated on March 18 to reflect the changes.

Directionally, Goldman Sachs expects GBP/EUR to depreciate further from current levels over a three-month timeframe, whereas previously, there was scope for ongoing appreciation.

However, looking at the six- and 12-month timeframes, a recovery by Pound Sterling is predicted.

"There is no doubt that Europe’s response to changing U.S. policies has been swifter and more definitive than expected," says Goldman Sachs.

This ongoing adjustment poses further upside for the Euro in the near term.

However, the Euro's strength will likely reach a turning point in about three months (i.e. GBP/EUR low).

"The surge in European currencies over the last few weeks has been meaningfully larger than the typical relationship with growth expectations (even if we allow for a more frontloaded shift than our economists expect). As a result, there is likely some room for disappointment," says Goldman Sachs.

"Once we move into the implementation phase, and it is worth noting that our economists are also below consensus for Euro area growth this year," adds the note.

The Dollar is also expected to stage a comeback as the investment bank's models show the currency is now undervalued relative to its peers.

The U.S. is implementing significant tariffs, which analysts say will ultimately underpin the USD. "The future tariff increases we expect should not be as easy for other countries to brush off."

"We maintain that the most likely path is Dollar appreciation—though from a weaker level and to a smaller extent," adds the research note.

To view the full set of EUR/USD, GBP/USD and GBP/EUR predictions, please see here.