"We maintain our EUR/$ forecasts at 1.38, 1.40 and 1.40 in 3, 6 and 12 months. This implies EUR/¥ at 135.2, 144.2 and 149.8 in 3, 6 and 12 months.
Compared with the UK, the upward revisions to consensus Euro area growth forecasts have been less spectacular. But they are still more notable than in most other countries. A number of additional factors support the EUR:
-A large current account surplus of about 2.5% of GDP.
-Moderate and stable capital inflows into the Euro area, in addition to the current account surplus.
-The ECB’s ability to ease policy is still frequently hampered by a strict inflation mandate and the hawkishness of some Governing Council members.
-Central banks have reduced EUR holdings in global FX reserves during the crisis and there is a potential to increase holdings again to reach the pre-Euro area crisis benchmarks.
But there are downside risks to EUR/$ too.
-Signs of stalling growth in the peripheral countries in the Euro area could force the ECB to act again.
-Fed Tapering, as discussed above, could lead to a EUR/$ negative shift in interest rate differentials.
-Renewed political tensions could hurt capital flows again.
Overall, it is probably best to describe the EUR/$ outlook as a flow-driven uptrend, which is at least partially offset by a EUR/$-negative widening of interest rate differentials. Upside and downside risks are linked to the relative strength of these two forces."
Thomas Stolper, Robin Brooks, & Fiona Lak - Goldman Sachs
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