Goldman Sachs Warns That Euro Optimism Is Overblown. Here’s Why

Optimism for a swift resolution to Europe’s problems “seems overstated for now,” say strategists at Goldman Sachs, adding that a significant rise in the euro resulting from a truce between Russia and Ukraine and increased defense spending will take time.

“The current equilibrium for the euro appears unstable,” write currency strategists Isabella Rosenberg and Michael Cahill. They note that markets have already begun to price in positive momentum for the euro, as economists raise their long-term growth forecasts while many in the market see potential upside from a possible truce agreement.

EUR/USD is trading around 1.05, recovering from a dip below 1.02 earlier in February. The common currency is on track to post a 1.3% increase this month, which would be its best performance since August.

“Part of the recent strength of the euro is justified by changing fundamental factors, but it also suggests that the market is either overly optimistic about the short-term boost or is placing greater emphasis on long-term developments than is typical,” the analysts say.

While a 1% increase in expected economic growth for the Eurozone typically leads to about a 1.5% rise in EUR/USD, they argue that “EUR/USD is already close to the ‘fair value’ on a trade-weighted basis, the current account has normalized, and expected growth is more delayed than the market typically recognizes.”

Tariffs also pose a risk that could weigh on the euro. “If tariffs and trade uncertainty exert greater pressure on European growth, EUR/USD could face a larger decline,” the analysts warn.

“Markets continue to price in only a small tariff premium in the exchange rate, but we believe that their introduction will ultimately bring the pair lower,” they add.

The decline in implied volatility in EUR/USD since the beginning of the year makes long-term volatility strategies a “cheap way to position for a more stable currency equilibrium,” conclude the Goldman Sachs strategists.

Technical Indicators for EUR/USD

• Short-term bullish signal: Positive crossover of short-term moving averages (MA) sets a positive tone.
• Downside trend risk: There is a danger of forming a new pattern of lower highs and lower lows after the price was repeatedly rejected at January highs. If this does not change, the formation of a weekly Hanging Man could weigh on sentiment.
• Technical picture: The last rise stopped at the 21-week moving average (MA); RSI and the fear-greed index point to profits, but Williams %R signals trend exhaustion.

Key Levels to Watch:

• Intraday support: 1.0420 (21-SMA)
• Weekly support: 1.0201 (61.8% Fibonacci retracement of the rise from September 2022 to July 2023)
• Intraday resistance: 1.0533-51 (January 27 high + 38.2% Fibo retracement of September losses)
• Weekly resistance: 1.0630 (December 6 high)

GBP/USD – Correction Gains Strength After Two-Month High

• Bullish breakout: The pair closed above 1.2610 (Fibonacci retracement) and reached a new two-month high.
• Correction risk: Daily chart momentum indicators are in overbought territory and show early reversal signals. A completed DeMark Sell Setup on Monday reinforces the risk of a downward move.

Key Levels:

• Intraday support: 1.2563 (February 19 low)
• Weekly support: 1.2476 (55-SMA)
• Intraday resistance: 1.2691 (February 24 high)
• Weekly resistance: 1.2811 (December 6 high)

BBDXY – Bearish Pressure Continues

• The fear-greed indicator shows bearish dominance, continuing for the longest time since August.
• The “Three Black Crows” formation on the weekly chart signals potential further losses.

Key Levels:

• Intraday support: 1,281.20 (February 24 low)
• Weekly support: 1,272.92 (December 6 low)
• Intraday resistance: 1,293.65 (February 19 high)
• Weekly resistance: 1,300.08 (55-SMA)

USD/JPY – Four-Month Low, Momentum Remains Bearish

• The pressure remains downward, supported by technical indicators.
• The pair is on the eighth bar of a DeMark Buy Setup, which may signal an approaching bottom.

Key Levels:

• Intraday support: 148.57 (February 25 low)
• Weekly support: 147.35 (October 8 low)
• Intraday resistance: 150.93 (February 7 low)
• Weekly resistance: 152.16 (21-SMA)

EUR/CHF – Double Top Formation, Focus on 55-SMA

• Rejection at YTD highs increases the risk of a double top.
• The 55-SMA is back in focus after support in the 0.9350-0.9320 zone held.

Key Levels:

• Intraday support: 0.9356 (February 10 low)
• Weekly support: 0.9320 (February 3 low)
• Intraday resistance: 0.9422 (21-SMA)
• Weekly resistance: 0.9514-18 (February 13 – January 24 highs)