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DM Monetary Policy: Divergence – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 30, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Goldman Sachs, expects all DM economies to grow in 2016, but the US will be the first to grow GDP demand above potential.

    Key Quotes

    “On average, the US has been fasting growing DM economy for several years in a row. It is for this reason that members of the FOMC in the US are preparing to exit zero policy rates, while central bankers in the Euro Area and Japan are likely preparing to extend monetary stimulus.”

    “The ongoing US recovery and diminishing slack in the labour market will drive a Fed tightening cycle – almost certainly starting in December – that will ultimately prove to be more hawkish than the market expects in light of our forecasts for a faster pick-up in inflation. We think the US Dollar will be the main beneficiary of this tightening cycle. While one of the lessons of 2015 is that the Fed will likely be cautious about giving a green light to large and rapid USD appreciation, the resilience of the US economy in the face of the substantial Dollar appreciation since mid-2014 gives us confidence that the Fed will ultimately tolerate further Dollar strength as it tightens policy through 2016.”

    “And in contrast, we think both the ECB and the BoJ still have heavy-lifting to do through policy easing. The fragility of the recoveries in the Euro area and Japan, the weaker starting point for inflation and inflation expectations, and the higher sensitivity to a China-led EM slowdown imply that the stance of monetary policy from the ECB and BoJ will stay dovish as the Fed begins to normalize rates. Weaker currencies vs the Dollar are the natural consequence – renewed easing from the ECB and BoJ, including lower rates and flatter curves, should encourage further portfolio shifts among domestics into risk assets and out of the Euro and the Yen, with rising risk-free returns in the US benefiting the Dollar.”

    “We forecast a roughly 20% appreciation in the Dollar versus the G10 currencies by end- 2017. Our 12-month forecast for EUR/$ remains 0.95, but we think there is a significant probability that this level is reached sooner given the potential for the ECB to ease aggressively in December. As far as the Yen goes, our 12-month forecast remains 130, a level that could again be reached sooner.”
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