May 30, 2018 / 12:07 PM / 6 months ago

Goldman Sachs cuts euro/dollar forecasts, citing Italian instability

FILE PHOTO: An illustration picture shows euro and US dollar banknotes and coins, April 8, 2017. REUTERS/Kai Pfaffenbach

LONDON (Reuters) - U.S. investment bank Goldman Sachs said on Wednesday it had cut its euro/dollar forecast for the next 3, 6 and 12-months because of uncertainty stemming from Italy’s political crisis, while HSBC said the dollar’s recent rally had further to run.

Goldman said it forecast the euro to trade at $1.15 over the next three months, versus $1.20 previously. It also cut its six-month forecast to $1.20 from $1.27 and the 12-month forecast to $1.25 from $1.30.

The euro has slumped this week to its lowest in 10-months, at around $1.15 EUR=EBS, after an attempt by two Italian parties to form a government collapsed, fanning fears of a fresh election that could become a de facto referendum on Italy's membership of the euro zone.

“Although we remain structurally positive on the currency, it has become difficult to envision significant appreciation over the near term,” Goldman analysts said in a note.

HSBC said it saw few impediments to a further rise in the dollar, which has been on a sharp rally since mid-April after investors began betting on greater divergence in monetary policy between the United States, where interest rates are rising, and the euro zone, where they remain in negative territory.

The dollar index .DXY has surged 6.5 percent in the last 30 days.

“From a short-term perspective we do not see any sign that positioning, sentiment or valuations are particularly stretched in favour of USD (dollar) longs. As such, there appear to be few constraints from a technical perspective on the USD rally extending further in the near term,” HSBC’s currencies analyst Dominic Bunning said in a note.

Reporting by Helen Reid and Tommy Reggiori Wilkes; Editing by Sujata Rao and Mark Potter

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